Bad Debts Provisions Surge; Bankers Put Aside RON740M In July

10.16.2011 By Ciprian Botea

Romanian banks booked provisions worth 739 million lei (EUR175 million) in July, up 16% from a month earlier, a sign that downside pressure on loan portfolio remains high and economic recovery is still sluggish.

End-July, the amount put by for bad loans reached a new record high of 27.8 billion lei (EUR6.6 billion), central bank data showed. The figure is 30% higher compared with the same period of 2010.

"Bank provisioning is tightly connected to economic developments and to a solvent demand for loans. Economic growth must be closer to its potential and the lending demand has to recover before provisions can drop," said Lucian Anghel, chief economist at Banca Comerciala Romana (BCR), Romania's largest bank by assets.

Bank provisions amount to 13% of total loans, a sizeable increase from 3% of total before the global financial crisis, when lending activity was thriving and banks used to report two-digit growths of their loan portfolios.

The rise in provisions is heightened by a freeze in loans, as private lending has been staling at around RON200 billion for the past two and a half years.

In July alone, banks added over RON850 million in "loss loans" (loans overdue by more than 90 days which are considered uncollectible and must be entirely provisioned). End-July, overall loss loans stood at RON38.3 billion.

The difference between provision and loss loans levels derives from a bank regulation allowing lenders to discount up to 25% of the collaterals' market value. The value of provisions adjusted for collaterals reached around RON25 billion at the end of July.

Factoring in the category of "doubtful loans" (loans overdue by 60 to 90 days), provisions adjusted for collaterals were at RON26.6 billion, meaning that local banks currently cover 104% of the existing bad loans.

The high level of provisions has led to increased pressure from banks on good paying clients, who have to pay high interest margins. End-August, interest margins for existing leu-denominated loans were roughly 6%, from a record low of 3.5% in 2009.

"The banks have certain capital requirements. The level of provisions obviously affects both interest rates and the solvent loan demand," Anghel said.

(English version by Florentina Dragu)