The Romanian banking system is in better shape, as the National Bank said in its latest reports. Bankruptcies in recent months, especially with Bancorex out of the picture, have brought solvency back to normal levels, after an alarming stay in the red area.
But the effort has placed an additional $3 billion burden on the budget. The central bank has also forced commercial banks to observe an overly cautious loan provisioning system which, on one hand, does not threaten the bank or the system when some loans become “non-performing” but, on the other, further discourages banks from lending to the economy.
The same NBR data show that banks have loaned very little lately.
Why? First of all, the state’s need to borrow large amounts of money has pushed interest rates on government bonds upwards, even beyond 70% in the first months of the year.
Given the circumstances, banks chose to “lay low” on government bonds instead of taking chances with lending, which is both unsafe and less profitable.
For companies that need financing, this tendency may be regrettable, but from banks’ standpoint, it cannot be condemned. After all, a bank, as any other business, must first of all be profitable.
And if government bonds yield safe and big returns, it doesn’t take a banker to choose this type of investment.
But interest rates have fallen drastically lately, and with them the profit of lending to the state. Banks must seriously consider channelling their money into loans – which make up the bulk in a normal economy – especially with all the money lying around unused in the banking system.
This explains why banks have diversified their lending offer, particularly for private individuals. Still, why aren’t they lending more to companies? By some accounts, interest rates are still too high; by others, lending conditions are too complicated.
Something in these arguments is true, but it is equally true that interest on deposits should not fall below inflation, and neither should interest rates on loans, which are just a few points above and cannot go down too much.
What is obvious, though, is that the difference between interest rates on loans and those on deposits remains too high, a sign that banks are not battling too much on this segment and therefore are not struggling to cut operational costs.
The second effect is that real estate collateral is still the way to go, with their assurance as to the evaluation of risk, unlike cases when a venture is credited based on a “business plan.”
Realty collateral, however, has its own drawbacks. The good side is that there is no risk to the bank and little financial audit is needed; the bad side is that in the overwhelming majority of cases, the realty turns out to have been overpriced and hardly attractive for sale.
Proof is the Banking Assets Resolution Agency, with its stash of bad loans, guaranteed, in their time, with countless buildings and land plots – which it now tediously tries to sell. And these “guarantees,” when auctioned, often amount to nothing.
Clearly the National Bank lacks the instrument to force a resumption of lending. Still, the state does have some means to ensure that banks exercise their fundamental role, that of redistributing savings to profitable ventures that multiply them.
Consider the hypothesis that banks no longer have the outlet called “government bonds.” That is, the Finance Ministry would only borrow from the populace to finance the budget deficit. But a hypothesis like this would make a politician dizzy.
What would it be like if the state could no longer borrow from banks, and inflation was not an option? It would mean that the only remaining way to finance the budget deficit would be with foreign sources – which remain difficult to secure and expensive – or by borrowing from the populace.
Anyway you put it, this leads to a budget deficit that tends to zero. With the kind of revenue we all know and with little tolerance for more taxes, the reasoning inevitably leads to less spending.
A point where any minister in any government, struck by a sudden bout of wordiness – along with concern for the voting citizen – will demonstrate with many words that not one dime can be spared, that his ministry – the most important one, naturally – should be spending at least three times as much.
Very soon we are about to see – for the umpteenth time – this immortal tendency. Look out for more arguing, claims and complaints during the year 2000 budget correction!