Isarescu tries to make foreign currency lending more expensive

The National Bank of Romania (NBR) is preparing to increase the minimum mandatory reserves commercial banks make every month as a percentage of amounts attracted, in order to continue with measures intended to discourage lending in foreign currency, Mugur Isarescu, the NBR governor, told Ziarul Financiar.

“We have to discourage lending, and since the possibilities to use interest rates as an anti-inflation instrument are limited in the current context, we can only resort to quantitative instruments, that is continuing to reduce the minimal reserves for RON and increasing those in foreign currency. We are ready to do this,” he said.

He did not provide any details as to where the percentage of foreign currency amounts attracted by banks might go, which should be kept at the NBR. The current level is 30%. Despite being a significant cost, commercial banks have managed to absorb this due to the low cost of foreign funding, which most often comes from parent banks, as well as to the rising volume of granted credits.

Isarescu added that he had signed the final version of the guidelines on containing credit risk on Wednesday, which would probably come into force early in September.

He also said that the NBR was working on a draft to regulate the operation of non-banking companies, which are currently unsupervised despite being a strong consumer-lending outlet.

The head of the central bank explained that increasing interest rates would be a counterproductive solution to the large inflows of foreign capital and the growth of the exchange rate. “It”s because we”re having these dilemmas about using levers and because we want to avoid a credibility problem for the interest rate instrument that we keep using quantitative instruments,” Isarescu explained.

The National Bank took the first step in this direction in February, when it decided to extend the 30% for foreign currency mandatory reserves to deposits attracted by banks for more than two years. In April it cut the rate for euro reserves from 1% to 0.7%.

Despite these measures, foreign currency denominated credit (which reached a nine-year peak in May) has increased far more than RON lending forcing the NBR board of governors earlier this month to extend gradually the application of the 30% minimum mandatory reserves to all deposits in foreign currency from commercial banks in an attempt to make foreign currency lending more expensive.

Commercial banks, however, are continuing to promote this type of loan at low rates, which shows they can still absorb the extra costs induced by the NBR”s administrative measures.