BULGARIAN National Bank (BNB) was due to start talks with individual banks whose lending policy the central bank believes to be too aggressive.
The move, which was expected to start in the week ending January 14, takes place against a background of widespread concern about rampant credit growth and a possible consequent risk to financial stability. The banks that were the focus of BNB’s concern were not identified.
Reportedly, much of the money that banks attract from abroad is being passed on for loans. With a rapid rise of indebtedness among Bulgarians, reported to have risen from 30 per cent of savings at the beginning of 2004 to 36 per cent by the end of the year, there is concern that defaults on loans could jeopardise financial stability.
Those banks that BNB has identified as too aggressive in their loans policies might be subjected to individual credit restriction measures on the bank as a whole, or to restrictions on certain varieties of credit products.
Such measures would be an add-on to steps already taken by BNB to slow down overall credit expansion.
In 2004, banks increased their credit portfolios by 48 per cent, and some institutions’ assets-to-credit ratios are believed to have reached critical levels.
Possible additional measures said to be under consideration include doubling the minimum reserve requirements, or higher liquidity coefficients. If such measures were brought in, banks would be forced to reduce the amount of money that they had earmarked to offer as loans.
However, banks might try to sidestep these moves by setting up leasing companies, because leasing activities are not regulated and are not subject to oversight by the Financial Supervision Commission.
The steps already taken last year included an increase from zero per cent at the beginning of 2004 to eight per cent by the end of the year of the mandatory minimum reserves.
BNB also barred credit institutions from including their current profits in their equity capital. The volume of loans that banks are allowed to extend depends on the size of their equity capital.
Some banks, including Raiffeisenbank, Central Cooperative Bank, EIBank, and DZI Bank, increased their shareholder capital in order to be able to continue with the credit expansion.
Forecasts are that the banking industry will see continued high growth of housing loans, which were the fastest-expanding products in 2004. There was an increase of 145 per cent, to more than a billion leva, by the end of the year.
With an eye on the increased activity in the real estate market, banks competed dynamically to get a share of the action, taking steps that included reductions of interest of housing loans. While the housing loan market in Bulgaria in recent years has offered mainly relatively short-term loans, it is expected that there will be a growth of loan repayment terms of 20 years and possibly longer.
Some forecasts project that interest on housing loans could go lower than 6.5 per cent in the course of this year.
Another factor that could influence credit expansion is a set of proposals, by a panel of Economy Ministry officials, to be included as amendments to the Consumer Protection Act.
The section of these amendments dealing with financial services would require banks to provide full information about the products that they offer. The move is designed to prevent banks putting forward incomplete or misleading claims about their products, and will bar banks from offering incentives such as gifts or other perks the value of which exceeds the value of the service itself.
The move, which was expected to start in the week ending January 14, takes place against a background of widespread concern about rampant credit growth and a possible consequent risk to financial stability. The banks that were the focus of BNB’s concern were not identified.
Reportedly, much of the money that banks attract from abroad is being passed on for loans. With a rapid rise of indebtedness among Bulgarians, reported to have risen from 30 per cent of savings at the beginning of 2004 to 36 per cent by the end of the year, there is concern that defaults on loans could jeopardise financial stability.
Those banks that BNB has identified as too aggressive in their loans policies might be subjected to individual credit restriction measures on the bank as a whole, or to restrictions on certain varieties of credit products.
Such measures would be an add-on to steps already taken by BNB to slow down overall credit expansion.
In 2004, banks increased their credit portfolios by 48 per cent, and some institutions’ assets-to-credit ratios are believed to have reached critical levels.
Possible additional measures said to be under consideration include doubling the minimum reserve requirements, or higher liquidity coefficients. If such measures were brought in, banks would be forced to reduce the amount of money that they had earmarked to offer as loans.
However, banks might try to sidestep these moves by setting up leasing companies, because leasing activities are not regulated and are not subject to oversight by the Financial Supervision Commission.
The steps already taken last year included an increase from zero per cent at the beginning of 2004 to eight per cent by the end of the year of the mandatory minimum reserves.
BNB also barred credit institutions from including their current profits in their equity capital. The volume of loans that banks are allowed to extend depends on the size of their equity capital.
Some banks, including Raiffeisenbank, Central Cooperative Bank, EIBank, and DZI Bank, increased their shareholder capital in order to be able to continue with the credit expansion.
Forecasts are that the banking industry will see continued high growth of housing loans, which were the fastest-expanding products in 2004. There was an increase of 145 per cent, to more than a billion leva, by the end of the year.
With an eye on the increased activity in the real estate market, banks competed dynamically to get a share of the action, taking steps that included reductions of interest of housing loans. While the housing loan market in Bulgaria in recent years has offered mainly relatively short-term loans, it is expected that there will be a growth of loan repayment terms of 20 years and possibly longer.
Some forecasts project that interest on housing loans could go lower than 6.5 per cent in the course of this year.
Another factor that could influence credit expansion is a set of proposals, by a panel of Economy Ministry officials, to be included as amendments to the Consumer Protection Act.
The section of these amendments dealing with financial services would require banks to provide full information about the products that they offer. The move is designed to prevent banks putting forward incomplete or misleading claims about their products, and will bar banks from offering incentives such as gifts or other perks the value of which exceeds the value of the service itself.
