2006: NEW RULES OF THE BANKING GAME
New banking rules and fierce market competition. That will be typical for the financial and crediting sector in 2006. Additional restrictions for
reduction of the crediting growth
which the Board of Governors of the Bulgarian National Bank (BNB) adopted with the amendments to Regulation N21 last November became valid from the very beginning of the year. According to them, crediting institutions that exceed the lending growth limits imposed by BNB by less than 1% will pay additional minimum mandatory reserves whose amount will be twice the amount of the excess. When the limit is exceeded by 1 to 2%, additional minimum mandatory reserves will be three times the excess. If credits have grown by more than 3% above the limit, additional reserves will be four times the amount of the excess.
The amendments to Regulation N21 are valid from the beginning of 2006. The first growth of the credits will be reported on April 15. Therefore, if additional provisions have to be paid, that will be done in early May.
For the first nine months of 2005, punitive instalments on the minimum mandatory reserves (because of exceeding the credit growth limits set by BNB) amounted to BGN383MN. Central bank experts forecast that the amount for the entire 2005 will reach BGN500MN. Whether or not their expectations will come true will be seen at the end of January 2006, when the 2005 financial results are to be reported. However, all statistical figures show that banks will have difficulties fitting in the restrictions. In two months alone - from the end of September until the end of November - credits have grown by 4.2% - from BGN17BN to BGN17.71BN. When the 2005 figures are reported this month, it will probably be found out that the 5% for the quarter has been exceeded.
The fierce competition in the crediting field will continue in 2006. Bankers expect that credits will grow by some 25% and will reach BGN24BN by year-end.
The accent will fall on mortgage loans again. In that field
the battle for a bigger market share
will expand further. Banks will keep wooing their potential customers with promotional interests and other bonuses. It will not come as a surprise if at the end of 2006 the average interest rate on these credits (which is now 6.7%) falls down to 5.5% and the total amount of mortgage loans grows from BGN2BN to BGN2.5BN.
In 2006, corporate lending will regain its position as a
leading banking service
The reason is that it is the least restricted one and a number of international financial institutions and large foreign banks are ready to launch credit lines under profitable conditions for financing small and mid-sized enterprises as well as large corporate projects. In 2006, the total amount of corporate loans is expected to grow from BGN11.5BN to BGN14BN, the average interest on short-term lev-denominated loans to fall from 9.39% to 7.5% and the one on long-term loans - from 9.86 to 8 per cent. Interests on loans in euro and US dollars will depend on the international financial markets as well as on the decisions of the Federal Reserve and the European Central Bank, but it is hard to predict their level in Bulgaria from now.
Unlike corporate loans, consumer credits which have been favoured in the past four or five years will probably fall into disgrace in 2006. The International Monetary Fund (IMF) singled them out as the major culprit for the constantly increasing import leading to an increase in the negative trade balance and the deficit on the current account of the balance of payments. This is exactly why consumer credits were made subject to the biggest restrictions. Provisions that banks allocate on them were doubled which resulted in additional costs for the crediting institutions. If this measure does not bring the expected result -
a contracted growth of consumer credits
to 25% a year, BNB will probably take new measures no later than next spring. This time the central bank is said to introduce special requirements for the solvency of the consumer loan borrowers, namely that monthly instalments do not exceed one third of their taxable income. The central bank is going to monitor this type of crediting very closely, since the population tends to grow more indebted and the quality of the credits launched gets worse. According to unofficial data provided by BNB, overdue consumer credits reached 8% of the total crediting amount as of December 31, 2005, whereas their share was about 6% in the beginning of the year.
Additional restrictions will fall on the loans to the population once a Consumer Credit Act is adopted. The National Assembly is expected to review the bill by the end of next summer. The texts it contains will restrict considerably the banks with regard to the number and size of fees and commissions they collect from borrowers of consumer loans amounting to BGN400 to BGN40,000. According to one of the texts in the bill
the customer is not obliged to pay interests
fees and commissions that are not explicitly mentioned in the agreement.
The document under preparation contains a regulation stipulating that a citizen has a right to make instalments on his debt in advance and that it will result in the respective reduction of the costs for the serving of the debt. However, there is one more important sentence saying that a customer does not owe additional expenses for paying off the loan before the term set.
A barrier is also planned to prevent possible agreements between a creditor and a debtor for arranging a loan that doesn't meet the requirements of the law. The loan will be considered invalid regardless of whether or not the customer has agreed to use it. Substantial fines varying from BGN500 to BGN10,000 are also planned for those who violate the regulations.
In general, the adoption of a consumer credit act will force the banks to play with their customers in accordance with new rules. Regardless of the expected restrictions, experts forecast that in 2006 consumer credits will grow from BGN4BN to BGN5BN and the average interest on them will be about 9% a year.
Part of the requirements regarding the repayment will be changed, too. In March 2006, all banks will begin national testing of their information systems for operating with the new
IBAN international number
which will be given to all bank accounts. This is a special international 22-digit code. It will be unique for each account and will be created automatically, as regulated in BNB's Regulation N13, without the intervention of the holder. The customers will be informed in written about their numbers in order to put them in the respective documents. The application of these new numbers will contribute to the faster, cheaper and safer money transfers between banks in Bulgaria and the countries of the European Union. Moreover, the lack of this kind of international number will burden the account holder with additional expenses for fees and commissions when he carries out transactions with it both in the country and abroad.
At first sight, the introduction of IBAN sounds a little abstract. But this is not an easy task at all. It refers to a change in the numbers of all bank accounts, a follow-up, and a test of the bank information systems in real regime. Only when all that has been established will the banks inform their customers about their international numbers. The schedule prepared by BNB stipulates that the new numbers of the bank accounts be put in exploitation on June 1. However, any lapse in the preparation for their introduction may delay this term, because it hides a danger for a collapse of the country's settlement system.
A new law on crediting institutions
will be reviewed and adopted by the National Assembly by end-September 2006.
Even though it is directed towards the banks, the new issues it contains will mainly refer to the rights and obligations of BNB. First of all, the Bulgarian financial and crediting sector will become entirely opened to large banking institutions from Western Europe. They will be allowed to open branches and offices in Bulgaria and offer their services to Bulgarian citizens and companies without asking for BNB permission. That will increase considerably the competition on the domestic market. As to the establishment of subsidiary banks, BNB will keep the power to decide whether or not to give permission.
BNB will assume additional responsibilities, because besides to banks it will also give operating permissions and supervise companies that issue electronic money. It means that each company that plans to accept funds from individuals and return them special cards which they can use to pay in shops must be approved by BNB. However, that will not refer to companies such as BULFON and Shell which already offered cards for payment of specific services - phone calls and purchase of oil.
BNB will keep its right to impose the criteria for capital adequacy, liquidity, amount of minimum mandatory reserves and provisions on classified loans. In fact, each supervising body in the EU countries has similar rights as this allows it to control the financial status of the banks according to the economic situation in the country.
It is not quite clear yet what rights BNB will have regarding the approval of various risk assessment models that banks will have to introduce in accordance with the new capital adequacy requirements, BASEL II, which are to become valid from January 1, 2007.
By the end of March 2006, all obscurities about the new banking act under preparation will have to be cleared so that it can be put forward to the National Assembly. According to the schedule coordinated by BNB and the Government, the act is to be presented for voting on second reading no later than September 30, 2006.
As a whole, the BANKER weekly expects that 2006 will change basically the image of the Bulgarian banking market. The rules which players on it will obey will become much stricter and will give advantage to the correct participants. Those who do not obey them will face lots of troubles.