The Bulgarian credit market was in a remarkably strong growth mode just a year ago. However, tighter international conditions have exerted a delayed effect on Bulgarian lenders, which are now facing a noticeable slowdown.

In 2007, the volume of loans grew 58 per cent on the previous year. Even when Bulgarian National Bank (BNB), concerned by the runaway growth, increased the minimum reserve requirement from eight per cent to 12 per cent in September, the number of loans being offered remained steady. Even though the cost of credit increased, Bulgarian banks – more than 85 per cent of which are foreign-owned – elected to absorb these costs themselves in order to maintain competitive interest rates on loans.

However, the global credit crunch has finally taken its toll on the Bulgarian market. Amid the global financial turmoil, parent banks have minimised large capital transfers and overall, credit institutions have become much more risk-averse and less willing to approve loans. According to statistics published by Sofia’s First Financial Brokerage House, new loans in November 2008 amounted to only 300 million leva, compared to 1.4 billion leva in November 2007.

The interest expenses/interest-bearing liabilities ratio, which represents the costs that banks incur over the preceding 12 months by using both wholesale funds and deposits, has increased by 1.15 to 3.4 per cent from September 2007 to September 2008.
Not only are lenders more cautious, but so, too, are borrowers.

According to Maria Ilieva, CEO of MKB Unionbank, "borrowers have also been reassessing and modifying their projects."

Commenting on these reassessments, Krassimir Tahchiev, the executive director of First Financial Brokerage House in Sofia, acknowledged a "slowdown in investment and a scaling down of businesses". He told Oxford Business Group that, despite the weakening outlook, he "expect[s] demand to exceed supply in the next few months", notably in the real estate sector where mortgage lending activity effectively stopped throughout the country in October 2008. Banks’ reluctance to provide loans has also impacted Bulgaria’s student population. While the country’s student loan scheme was launched a year ago, it remains idle. Consequently, Education Minister Daniel Vulchev has threatened that, unless student loans become readily available by March 1, a state lending agency will be set up to replace that particular role of the banks.
At a time when credit provision is on the wane, BNB has taken prompt action to reverse this trend and boost liquidity.

In November 2008, BNB lowered the minimum reserve requirements (MRR) for local commercial banks from 12 per cent to 10 per cent, while the rate on funds from abroad was reduced from 10 per cent to five per cent. Meanwhile the reserve requirement over deposits from the state and local government budgets is being held at zero per cent. From the beginning of 2009, the average MRR for the whole banking system will therefore be about 7.2 per cent.

According to BNB governor Ivan Iskrov, these "amendments [give] banks some leeway in their flexibility in the access to their liquid assets" and "attract additional external resources" to the Bulgarian banking system.

BNB announced that it intended to lower the capital adequacy ratio from 12 per cent to 10 per cent. Although still above the eight per cent requirement under Basel II, the central bank expects the relaxation of this policy will allow commercial banks to maintain adequate levels of liquidity and capital adequacy.

To compliment the efforts of BNB, the Bulgarian Bank for Development has assisted by providing 500 million leva to local businesses. This amount will target the financing of commercial banks and improve access to loans for both small and medium-sized businesses. Additionally, Bulgaria can expect to benefit from its European Union membership as local companies and authorities are eligible to apply for grants under seven programmes aimed at improving Bulgaria’s competitiveness. In total, Bulgaria is expected to receive about seven billion euro in EU funds by 2013. Such grants, however, are often slow to be disbursed, leaving companies to apply for bank loans and refinance part of the loan once EU subsidies are received. Yet the funds are expected to act as a stimulus for further lending activity within the country.

With prospects to mitigate the effects of the crisis both underway and in the works, the International Monetary Fund stands confident that both borrowers and lenders will emerge from the crisis in good shape.

<Photo: Reuters>