Банкеръ Weekly



The measures undertaken by the Bulgarian National Bank (BNB) in April 2005 for reducing credit growth are already yielding positive results. As compared to end-February 2005 when the aggregate amount of released loans was BGN14BN, according to preliminary data, extended credits totalled BGN15.8BN in end-June. This 12.9% increase is completely acceptable and according to some financial experts, gives hopes that for the entire 2005 loans will not go up by more than 35 per cent. If such a result is achieved that will mean that BNB's restrictions, undertaken on the insistence of the International Monetary Fund (IMF), have been entirely successful. In April 2005 the central bank's Governing Board amended Ordinance No 21, introducing provisions stipulating that the growth of credits reported by banks may not exceed 5% for the first quarter, 12.5% for the first half of the year, 16.5% for the first nine months, and 23% for the entire year. For most banks these restrictions were calculated on the basis of the volume of loans extended by them by the end of February 2005, increased by 4 per cent.If we apply this formula to the entire finance and credit sector we'll see that the growth from end-February till end-June (the first period to be reported) is about 8.5 per cent.Experts, acquainted with the preliminary balance sheet indicators of banks for the first half of this year, claim that all credit institutions have tried to fit in the limits in order to avoid BNB's sanctions. And they were that if a bank exceeds the maximum growth of loans, stipulated in Ordinance No 21, should deposit as mandatory minimum reserves in the BNB the amount of the reported excess. This requirement is a heavy burden to the credit institutions, because they do not get any interest on these deposits in the central bank and this money does not bring any yield. In fact, keeping such deposits in the BNB brings losses to the banks, as it is money attracted by clients, on which the credit institutions pay interest. That is why, any bank tries to maintain its mandatory minimum reserves as low as possible. It is said, however, that despite their efforts, some banks' managers have failed to fit in the restrictions. United Bulgarian Bank (UBB) and ProCredit Bank, for instance, have exceeded their limits by more that 4 per cent. DSK Bank and First Investment Bank (FIB) are on the edge. Their excess was below 1%, but nevertheless they had to deposit additional minimum mandatory reserves. The total amount of the sanction, to be paid by all credit institutions (as additional minimum mandatory reserves) is BGN275MN. It will be added to the aggregate amount of minimum mandatory reserves - BGN1.7BN, which the BNB collects, calculating 8% on the attracted short- and long-term deposits, attracted from citizens, firms and other financial institutions. The heart of any bank manager would sink, considering that if that amount was released as consumer credits (the interest on which is between 12% and 15%) the yield would be about BGN240-300MN.Moreover, some banks have been affected by another restrictive measure of the BNB. In April it banned the transference of credits to a less riskier group if the borrowers have not serviced them in due term for at least six months. This restriction hits directly the banks' financial results, because they calculate provisions on the loans depending on the delay of the repayment instalments by clients. And the provisions in question decrease the financial results of credit institutions. Prior the enforcement of BNB's restrictions, some banks used to agree with the debtor to make two or three repayment instalments and after that transferred his debt to a less riskier group, cut down the provisions on it and raised their profit. If it is audited, the profit can be used to increase the equity capital of the bank, on which the volume of loans a bank could extend depends. This source of quick increase has been tapped, too. All in all, banks will be forced to keep a tight rein on crediting by the year-end. If the growth of loans does not exceed 35% for a year, the BNB may lift the restrictions as of March 2006.

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