Банкеръ Weekly



The International Monetary Fund (IMF) drew the attention of bank managers and analysts to the state of the finance and credit market in 2004. In the IMF report on Bulgaria, published on February 12, special notice was paid on the speed by which bank loans increase in this country. At first sight there is nothing surprising in that, as the former head of the IMF mission for Bulgaria Jerald Schiff had been insisting since the autumn of 2003 for restricting the credit expansion. But there is a disturbing conclusion in IMF's report: if the volume of extended loans continues to increase at the 2003 rates, this could create problems to the bank sector and shake the trust in it. These forecasts made by the IMF experts sound as quite a serious warning. Moreover, in the beginning of the paragraph devoted to the bank sector (on page 14) it is written: The quick increase of credits launched by commercial banks in the last two years is to a large extent a compensation after the crisis of 1996-1997. This sentence could be interpreted as follows: Bulgarian banks are trying to reach the levels of crediting from the period before the financial crisis. Especially for the BANKER weekly the IMF resident representative for Bulgaria James Rolf said there was no hidden hint or implied meaning in that sentence. But the memories of the bank crisis in 1996-1997 when 19 credit institutions were closed down are still quite alive. And whatever connections are made between the present state of the Bulgarian financial sector and those times, they could cause serious uneasiness among the clients of our credit institutions. The question is should we doubts the good health of Bulgarian banks?On the request of the BANKER James Rolf commented: The present situation has no resemblance at all to that in 1996 and 1997. Your bank system is almost entirely in private hands and is in excellent health. A large part of it undertakes the important part of directing the savings of the population to financing efficient economic projects.Recent data of BNB's Bank Supervision Department, which the BANKER specially demanded, do not give occasion for worries either. In end-September 2003 almost 92% of all allocated loans were serviced on a regular basis. The capital-to-assets ratio of the entire domestic bank system is 22.97%, compared to the minimum 12%, required by the BNB. In other words, the capital-to-assets ratio is 2.5 times better than required by the Bank Supervision Committee with the Bank for International Settlements in Basel. BNB's Governor Ivan Iskrov flatly stated in front of the BANKER that the bank sector was stable and ruled out the possibility for unpleasant surprises. Central bank's Vice Governor and Head of the Bank Supervision Department Emiliya Milanova also confirmed that the prevailing part of the extended credits were serviced regularly and there were no indications of worsening the situation. Is that almost idyllic picture entirely realistic? The movement of the bank sector's financial indices shows that some of IMF's warnings are not groundless.The increase of credits in Bulgaria is impressive indeed. Their total volume rose by 31.6% in the first nine months of 2003, from BGN6BN to BGN7.94BN. Loans to citizens alone increased by 54% from BGN1.21BN to BGN1.86BN. Compared to 2000 this statistics suggests an even more aggressive growth of the aggregate volume of credits. Within three years they rose by 162.8%, and the loans to natural persons marked 227.2% increase. Central bank's data unambiguously show that throughout all that period the credit expansion became possible thanks to the increased deposits of citizens and companies in banks. From the beginning of 2000 till end-September 2003 their total volume rose by 98%, from BGN6.4BN to BGN12.69BN. According to bank statistics, however, deposits are going up much more slowlier than loans. Furthermore, BNB's experts have calculated that in the end of 2003 banks invested in credits BGN0.70 per each BGN1, deposited in them (by a citizen or a company). In the beginning of February 2004 Stoyan Manolov, head of Distance Control with BNB's Bank Supervision Department, said that the proportion between extended bank credits and attracted deposits was 70 per cent. According to him, this is the critical barrier and if surpassed the stability of the Bulgarian finance and credit sector might be endangered. If the credit expansion in 2004 continues at the rate of 2003, banks will have to resort to their assets of quick liquidity, i.e. cash, the money kept in BNB, their deposits in other financial institutions and funds invested in government securities. But the decrease of these (of quick liquidity for banks) assets might be really dangerous. Second, the IMF experts warn that the fast growth of credits leads to cash flow out of the country. Though such a statement may sound ridiculous, it has a few good reasons. The expansion of bank credits increases the amount of import, as households and companies borrow money to purchase consumer and investment goods from abroad. This has contributed to the sharp deterioration in the external current account deficit, from a little over 4% of the gross domestic products (GDP) in 2002 to around 8% of GDP in 2003, the IMF experts claim in their report on the Bulgarian economy. To make it clear, we should explain that the above-mentioned external current account deficit includes the trade balance (the difference between Bulgaria's import and export), as well as the balance of transport and tourist services. When the final result of all these indicators is negative, there is deficit. It means that more convertible currency (US dollars, euros, British pounds, Swiss franks, and Japanese yens) leaves the country than it enters. So, if there are no resources to compensate the outflow, the country's forex reserves go down.As a result, the large deficit on the current account becomes a direct threat to the stability of the currency board and to the national economy as a whole (part of which is the bank system).The fact that Bulgarian people use borrowed money to purchase imported goods means that there is no competitive production in the country, that this production is not at adequate prices and cannot satisfy the consumers demand. This is an indicator of the unenviable competitive power of the Bulgarian economy.The IMF experts also claim that investments that entered Bulgaria in 2003 cover 84% of the country's external current account deficit. That allows the country's forex reserve to become EUR5.3BN at the end of the year, the experts say. However, they fear things may not go that well in 2004. According to their forecasts, foreign investments will cover just 74% of the current account deficit which is expected to reach 7.5% of the GDP. The IMF analysts say that if the deficit is not reduced, and the predicted amount of foreign investments proves unrealistic, Bulgaria's currency reserves will begin to melt. This will reduce confidence in the currency board and the banks' solvency. That is why the IMF insists on taking measures to reduce the credit expansion.According to James Rolf, the Government and the BNB are making efforts to fulfil the task. In turn, the Ministry of Finance and the Bank Consolidation Company (BCC) warned the banks they would withdraw the deposits they have in them. Which means that the money now used by banks for the crediting of some of their customers will suddenly be over.In the meantime, the BNB cut the credit delay term, at the expiration of which a credit will be considered a loss, to 90 days down from 120. This measure will force banks to be more prudent in the crediting process.Moreover, in early February the Governing Board of BNB decided that the single register of bank credits led in the BNB will note all credits launched. Until recently, the register only marked credits exceeding BGN10,000. The change will enable the banks to watch strictly the financial condition of their debtors.It turns out that, because of the current situation, BNB should hold the whole banking system under tight control in 2004 and should take measures to react towards any sign of deterioration of its indicators. The problem is what ordinary people should do as they have neither time nor knowledge to watch and to react to potential problems in the banks. Withdrawing their deposits or keeping their money at home is not an appropriate solution. It's better for them to change their savings in euro and hold them in small deposits in credit institutions with undisputable reputation. That's how their money will both bring profit and be protected against a possible high inflation.

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