CREDIT EXPANSION BECOMES A CONCRETE DANGER
Emilia Milanova, BNB Deputy Governor, to the BANKER weeklyMrs. Milanova, the Head of the IMF Mission Mr. Hans Flickenschield said during his visit in the end of September that credits keep growing with a higher speed. In your opinion, what is the effect of the series of measures taken by the Bulgarian National Bank (BNB) and aimed at restricting the growing speed of crediting?- The Bulgarian National Bank agrees with Mr. Flickenschield that nothing indicates the crediting expansion is calming down. Since a maximum of BGN409MN worth loans launched was registered in April, the speed of growth slowed up in May and June. That is why we thought that the measures would lead to a lower speed of the crediting activity. However, in July the amount of credits launched jumped up again reaching BGN546MN. It's true that it reflected the big credit lines totalling BGN143MN launched to M-Tel. But even with this amount deducted from the total sum, loans in July are up by 53% compared to July 2003. In August, the absolute value of the growth is BGN165MN but you should take into account that in August 2003 the amount of credits went up insignificantly, too.It's worth noting that the crediting growth has been entirely financed by the increased deposits in the banks. But I think that deposits are already an exhausted source for a continuing credit expansion. Statistical figures are eloquent. During the first half of 2004, credits have increased by 20% (equal to BGN1.9BN). Their growth rate is higher than the rate of the total amount of bank assets and the growth rate of credits in 2003. At the same time, deposits are up by BGN1.950BN which is a sign that practically they finance the entire increase in the credit portfolio.Last spring BNB initiated the application of measures that allow us to manage the risk caused by the growth of credits. That is why we amended Regulation N9, so that we let the banks create buffers of money reserves to take the pressure of the enlarged credit portfolios. Moreover, we amended Regulation N8 on the capital adequacy by restricting the banks' ability to include their current profit in the net worth. Now this can only be done when the profit is reduced by the amount of current taxes and expected dividends and is audited. The amendments to these two regulations brought results. That is why there are more banks now whose capital is no longer sufficient for credit expansion.Did any banks declare to BNB they would take measures to raise their capital?- All banks with capital adequacy approximating the 12% minimum developed special capitalisation programs and committed themselves to observe them. Otherwise, they will be forced to restrict significantly the speed of their credit expansion.How many are these banks?- Eight.What do their programs stipulate?- Various measures - for example, raising the shareholders' capital or increasing the net worth, through hybrid instruments such as subordinated term debt. Apart from improving the stability of the banks, these measures have one more positive effect - they help for attracting foreign investments.Is it possible for the credit portfolios to worsen unexpectedly because of the continuing fast increase of credits launched?- I would like to underline that there is no such danger in a short-term perspective. In spite of the incessant credit growth, the quality of bank assets remains good. In the middle of the year, 93% of all bank credits were being served properly. This percentage is higher than it was in March 2004. Non-performing credits are decreasing, too. They now account for 2.5% of all loans. The share of problematic assets is quite small, too. It is 1.3% and as an absolute amount it is BGN18MN. It means that they do not have great influence on the profitability of the banks and cannot provoke erosion of their capital.However, our analyses show that the absolute amount of classified credits is permanently growing. These are the loans with payments delayed for 30 to 60 days or loans that are being performed but the borrowing companies are in a poor financial condition. This type of credits has grown by 24 per cent. It's true that their growth rate is twice lower than the rate of growth of bank loans. But the conclusion of the BNB Bank Supervision Department is that banks will be forced to allocate more and more human and financial resources to manage the increasing credits amounts.It is known that there is an early warning system in the Bank Supervision Department which is used when risks arise for the stability of the banking system. What are the conclusions from its analyses?- I think I should read you some of the conclusions in the latest analysis: The credit risk kept increasing despite the supervising and financial measures taken for reduction of the growth of credits. A prevailing part of the banks ignored the signs given by BNB that credit growth needs to be held up. The level of capital risk grew considerably...I will add that nineteen banks have capital adequacy that is very close to the lowest 12% required. And they are all banks that have registered a significant growth in the past few quarters. We consider this a sign that there are serious weaknesses in the process of capital planning and capital support.I will also discuss another issue related to the risk profile of the banking system. The ambition for keeping the market positions and seeking financial resources for the banking activity leads to much stronger competition on the market of deposits. This aggressive campaign for attracting more funds from individuals and companies at high interest levels makes us question the liquidity and the quality of the banks' revenues.Obviously, there is a growing need to tighten the measures aimed at putting the credit expansion under control. I want to make this clear. Regardless of these aspects of the risk profile of the system, most banks are now able to cover all of their risks. This is proven by the fact that last June 24 banks were given the highest rating by the KAEL system which BNB uses to assess the credit institutions. However, I think that in order for the bank supervision to be efficient, measures should be taken as soon as an initial risk is detected. That will help for avoiding more dramatic events in the future.Usually BNB conducts the so called stress tests which show in what condition banks would be in case of a worse economic situation. Have you made such tests recently?- BNB has been conducting these tests every quarter for more than one year. The last one was carried out in June. The results do not sound relieving. It turned out that if delayed loans grow by 5% (this is the first indication that the economic situation is getting worse), the capital adequacy of 19 banks will fall below the 12% minimum and four of them will even have a negative result.Since the situation is disturbing, what kind of additional measures will BNB take in order to restrict the crediting process?- First, we shall introduce measures that we already discussed with the International Monetary Fund (IMF). There is a requirement from October 1, 2004, that 50% of the banks' ready money should not be considered minimum obligatory reserves (at present, all of their ready money is part of the reserves).The governing body of the central bank is going to discuss whether to raise from 4 to 8% the minimum obligatory reserves allocated on funds attracted by the banks for more than two years, or choose the direct deduction of 100% of the ready money from the minimum obligatory reserves.Our analyses show that in order to reduce the credit growth significantly, we must either introduce obligatory proportions between the liquid assets and all bank assets, or increase significantly the minimum obligatory reserves. The second method was tested in Croatia where at present the minimum obligatory reserves amount to 19 per cent. The method had a very strong effect on the restriction of the credits. If banks in Bulgaria fail to limit the crediting growth by year-end, the governing body of BNB is going to discuss the introduction of one of these measures in order to achieve the desired effect.