A WORSENING of the quality of household and housing credits in Bulgaria would lead to gradually increasing risks for the local banks' portfolios.

This was the conclusion made by Bulgarian National Bank (BNB) deputy governor Emilia Milanova in a speech to the international exhibition Banks Investment Money that was held in Plovdiv on February 15-17.

Credits to individuals are considered as lower-risk credits, according to the international standards. However, due to their enormous growth in Bulgaria, they are turning into a menace to banks.

Non-performing credits accounted for eight per cent of all consumer credits at the end of 2005, compared to 3.65 per cent a year earlier. Of them, mortgage loans marked a 2.34 per cent year-on-year increase and stood at 7.34 per cent at the end of 2005.

The growth rate of the non-performing credits can exceed several times the growth rate of the total loan portfolio of banks. One of the key factors for this is the underestimation of the creditworthiness of the clients and the lowering of the standards for evaluating clients' creditworthiness, Milanova believes.

That is why the BNB will demand that commercial banks make changes to their risk evaluation methods, she said.

During the last mission of the International Monetary Fund (IMF) to Bulgaria back in January, it was agreed that the central bank would introduce two milder measures (in addition to tougher ones already in effect) for curbing consumer and mortgage lending growth.

The BNB said it would make a recommendation that banks should look for a disposable income of at least 100 leva per household member when issuing a consumer or mortgage loan, so that the family's monthly requirements are met.

Although the IMF insisted that banks should expect at least 50 per cent self-funding for mortgage loans, it was agreed that no such requirement would be set. The measure that will apply is setting higher capital requirements by raising the risk weight of mortgage loans when the customer's self-funding is less than 50 per cent of the price of the property he or she wants to buy.

The IMF has warned that loans to individuals in Bulgaria have been rising much faster than corporate credits and posed greater risks for the country's external account balance. This is why measures will target mainly consumer and mortgage loans.

A total of 2.4 billion leva worth of credits was extended in 2005, compared to 2.15 billion leva in 2004. Commercial banks registered a decrease in the volume of the non-performing credits to 7.28 per cent at the end of 2004, down from eight per cent a year earlier. As a whole, the credit risk level in the banking system is good against the backdrop of the ongoing restructuring of assets, Milanova said. She noted that they do not expect changes to the credit market in 2006.

Finance Minister Plamen Oresharski, who opened the fourth edition of Banks Investment Money, said he was "impressed by the products of the financial institutions" and "happy that the sector is developing more and more dynamically".

Forty-two banks, insurance, pension and health insurance funds, non-banking finance institutions and IT companies, among others, took part in the exhibition. Greece was the official country partner to the event.

The sustainable development of the financial sector will give an impetus to the Bulgarian economy in the year when this country is making its last efforts for full membership in the European Union, Oresharski said at the opening ceremony.

In his view, there is a shift in lending to the non-banking sector and to foreign financial institutions.

Credit growth in 2006 would remain below 20 per cent as a result of the central bank's restrictive measures, compared with 32.7 per cent in 2005, BNB deputy governor Dimitar Kostov said.

The problem with the Bulgarian economy is that demand is higher than supply, IMF resident representative James Roaf said at a conference on the role of the financial sector for economic growth. According to Roaf, controlling demand will help Bulgaria strengthen its fiscal policy and carry out structural reforms. Credit growth has made the economy vulnerable, he said.

Postbank's executive director Anthony Hassiotis, however, said the restrictions on lending should not be very tight, because that would hamper the development of the small and medium-sized business and delay the improvement of the living standards.

"Banks are strong not only when their credits are safe, but also when their operations are productive," said Hassiotis, and urged foreign companies to invest in Bulgaria.
The consolidation of the Bulgarian banking sector would continue following Bulgaria's accession to the EU because of its relatively small market and the large number of banks, Lyudmil Gachev, executive director of Hebros Bank, a member of UniCredit Group, said in a speech to the forum.

He believes that Bulgaria's EU accession will bring new competitors from within the union to the Bulgarian market.

Banks would gradually shift their focus from volume to efficiency of service, Gachev said. Following Bulgaria's EU accession, interest rates will come close to those in other EU countries.

The decrease in credit growth was already a fact on the Bulgarian financial market, Gachev said. Despite that, South Eastern Europe will remain the most dynamically developing banking market in Europe, with an annual growth estimated at 19 per cent for loans and 17 per cent for deposits, a forecast by Bank Austria Creditanstalt shows.