The party is over: margins must be cut down to half!

Banks are no longer encouraging Romanians to save money. The interests on banking deposits are just one step away from sliding below the inflation, and have already become real negative for short terms.
Moreover, the trend to increase consumer and housing lending leaves people with little cash to deposit with banks, because all of it goes to loan repayment, since incomes do not go up accordingly. 
The National Bank of Romania (NBR) governor Mugur Isarescu feels the gap between passive and active interests should reach an optimum of 5 to 7 percentage points. The average spread now reaches 10 percent, and peaks at 15 percent in some cases. Isarescu does not want to say when this cut should be done, though. Since interests on deposits can no longer go down, it is the interests on credits that should be cut, to bring more cash in the economy. Narrowing the interest spread will diminish the banks’ profits. Isarescu suggests them to take a look at the immobilised assets that reduce profitability, as well as at expenses.
NBR is determined to do whatever it takes to block any further rate cuts for interests on deposits and is planning to improve its ways to intervene on the market. A new instrument would be the deposit certificate with longer maturities – a solution under debate for two years now. They could help the central bank more readily absorb the liquidity surplus from the market.
The risk of having low interests discourage savings makes the National Bank issue a warning: the banks that keep pushing for interests decline will only end up with problems.
“From now on, every new interest cut for deposits becomes dangerous. We cannot rely on the hedge between real positive and real negative interests forever, because Romania cannot afford to discourage savings, as they are one of the main sources for investments,” Mugur Isarescu yesterday said.
Annualised inflation had reached 17.1% by late March, while the average interest amounts to 12% for one-month deposits and to 15% for one-year deposits. Except the short-term interests, all the other interests are still slightly real positive considering the inflationary decline prospects.
Savings are still going up, yet they account for very little of GDP (some 17% in 2002). “Lending is already progressing faster than savings,” the governor says.
NBR fears the “much too fast and unsustainable” decline in interests on deposits could drive the individual consumers’ and corporate cash away from banks in the long run. The banks, however, bet on the very little options to banking deposits.