Debt crunch effects are far from over: Lending picks up, but trust is still low
While the Romanian government gloats over the positive economic results of the past period, banks pick themselves up off the floor and try new lobby moves to regain consumers‘ trust. As lending picks up, companies seem to recover some ground, while new insolvency rules emerge in the retail and households sector, writes Bogdan Tudorache
"How many of you believe that the crisis or even the aftermath of the crisis are over?", begins the speech of Fritz Mostbock, deputy chair of Austrian Financial Analysts Association (EFFAS) to a packed audience of bankers and analysts in Bucharest. But as he summons us to raise our hands, nobody does.
Analysts know that the crisis, or even its aftermath are far from over, in spite of the somehow-soothing macroeconomic results of 2014 and 2015.
"Some people think that because of some indicators (the crisis) is over. But the growth is not solid, not robust, not built on sustainable basis," says Mostbock.
As the debt crunch has not yet finished, we're still exhibiting a lack of trust at the banking and financial levels. Customers have failed to secure long-term loans during the past seven years, not helped by requirements for extra collateral, and so trust in banks has decreased. Now it is time for the financial system to either reinvent itself, or go bust. Also, BRICS countries such as China or India have passed through a severe decrease or even a hard landing of their own economies (a steep slump in economic growth or even a recession), influencing the entire emerging block.
However, Romania is significantly removed from the shakes and turns in China, says Mostbock, and the local economy has stabilised for the moment, fulfilling at least part of the Maastricht criteria of 3 percent public debt to GDP limit (Romania has about 2 percent) and debt to GDP ratio of under 60 percent to start Eurozone accession talks.
"Romania has stabilized its position, so it should fully benefit from it," says Cristian Popa, former vice-governor of the central bank.
As it turns out, Romania`s IMF dependency is now over, as the fund finished its last agreement at the end of September, and there's no renewal under negotiation for a precautionary agreement, also says Guillermo Tolosa, IMF representative for Romania and Bulgaria.
"Should the government ask for a new agreement, we will be ready to discuss it," Tolosa adds. But as the debt crisis is not solved, the environment that we'll live in for the next decade will keep its current pace, Mostbock adds.
Saying "Good bye" to the Eurozone
Many critics accused the Romanian National Bank (BNR) of delaying too much the admission to the Euro area. However, even if true, it now seems to be an action of merit. Governor Mugur Isarescu's stance on Euro adoption has always been frail, in spite of reassuring statements, while the politicians only proclaimed its imminence to gain more votes, knowing that it cannot be done in the near future.
But Isarescu, a prominent member of the international financial community, may have not only followed the guidelines of the Maastricht criteria, when deciding it was better for Romania to keep its monetary leverage and independence. The grim situation created around the Grexit and the perspective of losing the lever of monetary policy in curbing inflation and keeping the interests rates and the banking system under control may have contributed, too.
So, the most important determinant for the lack of interest in adopting the Euro was, up to now, the need to have the fiscal-monetary policies aligned. The lack of planning in this direction proves that the governments understood the need of an independent national monetary policy to counterbalance the poor budget collections, leaving the poor accomplishments in the Maastricht criteria zone during the past years taking just the second place.
As well, Poland's latest stance is that it will never join a "burning Eurozone", as central bank governor in Warsaw, Marek Belka, was quoted as saying by The Telegraph. In addition, Romania's purchasing power is expected to be severely diminished when adopting the euro, as it happened to all states that adopted it, by rounding up the decimal pricing.
No matter what the reasons, it appears that the 2019 target for Romanian Eurozone accession is now doomed.
"Choosing 2019 wasn't necessarily an impossible target. We deemed it as an ambitious one…2019 became less and less feasible when its announcement was not followed by the creation of an action plan, much less putting it into practice," admitted Bogdan Olteanu, vice governor of the BNR, within a conference organized by Romanian Financial Analysts Association (AAFBR).
The Polish governor Marek Belka, a former head of the International Monetary Fund's European division, said the Eurozone was at risk of becoming trapped in a "vicious circle" where closer fiscal integration became more difficult because of splits over structural reforms and austerity.
"As long as there is divergence or as long as we have problems in some countries, it's more difficult to build up a solid foundation for the real fiscal union in the Eurozone. So this is a little bit of a vicious circle," Belka said.
According to Mostbock, the Euro area also suffers from inconsistency in fiscal policy regime, each of the 19 block countries having different legislations, whereas its archrival, the US Dollar, benefits from fiscal conformity of its member states.
In the meantime, other experts such as Hans Timmer, World Bank's Chief Economist for Europe and Central Asia Region, also said they wouldn't advise Romania to join the Eurozone too soon, given the recent turmoil.
"Before the crisis, your greatest vulnerability was the current account deficit. For now you must wait for the Eurozone to stabilize and recover as much as possible the gaps against the West before deciding to join it," Timmer was quoted by romaniajournal.ro during the Economic Forum in Krynica, Poland.
But there is still hope for Europhiles. Speaking with a central bank high official, The Diplomat – Bucharest has learned that "no official decision has been taken to give up 2019 as an official target for adopting the Euro."
Banking lending still not into the comfort zone
While Mostbock says that the debt crisis is not solved, and that "this is the environment that we will see for the next decade," he adds that low interest rates will accompany us for a long period of time. However, the CEE region will grow more than the rest, as it is still an emerging market... and new investors are to come.
"We, at Deutche Bank, are looking towards emerging markets more, to find good opportunities for investment", explains Frank Klein, EFFAS executive committee member and Deutsche Bank's Asset Management division (DeAM) Managing Director.
Klein says now is the time to invest, in a counter-cyclical move, while opportunities are still cheap.
In the meantime, interest rates are hovering at around 4 percent for company Euro-denominated loans and at 4-8 percent for retail and real estate RON-denominated loans, but even if rates have dropped lately, there is still a weak general demand for lending.
"We see a weakness in lending…Everything depends on the foreign direct investment…But Romania is complacent, familiar with the situation as from football: after one good game come three bad ones," as Cristian Popa describes the overall status of the economy.
While the demand for retail personal loans and mortgages has timidly grown, most of the lending demand in the corporate segment still comes from large firms. The SME sector is either undercapitalized, or overindebted.
"If you split companies up by size, you will see most of the lending demand still comes from large firms. Mid-sized companies are still quite heavily indebted. If you do (calculate the ratio of) debt to capital, or debt to assets, the numbers are large. I am referring to the National Bank's stability report for the latest numbers. But even when I was still (vice-governor) at the (central) bank last year, when we did this analysis for 2012-2013, we looked at numbers showing debt at four to five times the capital," Popa explains.
This proves once more that the downcycle is not over yet, banks are still risk-adverse, and even if the growth resumed for about three years, bankers will still wait for more signs to get into the comfort zone and relax their lending scoring conditions.
Yet, the loan to value ratio grew from a maximum of 50 percent to about 65 percent in some cases, while the local corporate interests fell below 4 percent. Some bigger projects find more appealing the 2 percent rate offered via external syndication. Large real estate project developers such as NEPI, AFI Europe or Sonae Sierra borrowed hundreds of millions of Euro (all three entities took about 550 million Euros) during the past year inside large syndicated agreements, while the capital market has seen zero interest from private investors, so far.
"I would be happy if the lending relied heavily on loans to corporations, for productive purposes - for investments and work capital financing purposes - happening at the same time that domestic deposits are increasing again. And I would like to see more debt raised through the capital market," Popa adds.
In Romania, foreign savings are growing slowly. After what happened with the Greek banks, the economy is still prone to rely on domestic funding, rather than foreign.
Yet, some sectors of the economy are booming, such as IT and agriculture. Robert Rekkers, CEO of Agricover IFN, a non-banking financial institution tells The Diplomat – Bucharest that if a few years ago there were just 300-400 customers annually (at 2012-13 levels) borrowing average loans of 150-200,000 Euro, now the average loan has decreased to 80-100,000 Euro, but the number of annual clients has climbed to a few thousand. That is "because we've penetrated agriculture microfinancing, a market segment at which others do not even look".
At the same time, Agricover has become increasingly courted by private equity investors.
"All the time we are approached by investors that want to have a part of the cake. Agriculture is hot," said Rekkers. "And we are capitalized. Financing costs are no longer in double digits, the cost is very low now and liquidity is abundant. Opportunities are great in Romania. All you need to do is move", Rekkers said.
Retail trust, gone with the wind
While 50 percent of Romanians do not use banking services, more than 25 percent of the retail clients are overindebted, meaning they cannot take more loans, as revealed in a study by the Romanian Banking Association (ARB).
About 43 percent of the active workforce has at least one loan, and the banks index that measures the delay of payment for the loans on periods larger than 90 days (in default), called the non-performant loan rate (NPL), stands at about 14 percent.
This latter figure takes into account only loans outstanding within the banks and it does not include non-financial lending bodies. The index decreased during the past year by about 8 percent, but that is mainly due to banks having written down – or even off - NPL portfolios, transferring them to debt recovery agencies or giving them up altogether.
But the truth is that retail lending, although showing a strong double-digit increase in the first months of this year for its national currency component, has dropped during the same period in its Euro and other foreign currency components, especially since banks are forced by courts to exchange the Swiss-francs (CHF) loans to RON.
So the recent growth is far from revealing the real spectrum of the retail banking lending situation.
"Most of the trust between bankers and clients is lost", says one banking official.
And financial institutions, no matter how risk-averse, strive to gain customers back. An example is the newly- launched educatiefinanciara.info portal, the bankers association (ARB)'s latest project launched with high hopes to educate the Romanian public, so the latter's decisions regarding banking services will be more advisedly taken, but also to help the former regain customers' trust.
Retail lending in the national currency picked up this year, with BNR fearing it would have to implement new measures to slow it down if it reaches a pace larger than 30 percent. The growth rate was just 3.4 percent on an annual basis, in July 2015, as compared to the same month, last year.
RON-denominated loans to the general population grew 12.6 percent, at the same time overall forex loans dropped ten percent during the same period, according to The Diplomat's calculations based on the latest BNR statistics.
One of the factors that should be taken into account for the RON lending growth is the refinancing from other currencies such as CHF or even Euro-denominated loans. The Euro lending to population decreased 7.6 percent in the same period, while loans expressed in other foreign currencies (mainly USD and CHF) dropped 23.3 percent.
The volume of these loans include the NPL ratio, which dropped from 22 to 13.9 percent across the summer also artificially, as the overall lending volume increased while portfolios of NPLs have been written-off.
In the meantime, BNR officials estimate that the growth in retail lending may enjoy a 20 percent annual pace, but a worrying figure for the central bankers is the threshold of 30 percent.
"We must see how the market evolves, and if the lending will accelerate too rapidly, we may have in mind loan to value measures," says Eugen Radulescu, director of Financial Stability within BNR.
If the lending spree in the retail households segment continues, BNR will restrict the lending. There might be a measure to cap the loan level against the sale value of the goods in question, meaning the money-up-front level will grow.
Retail's main issue, debt recovery, has new rules
Romanian banking NPL rate of 13.9 percent also means that banks have still on their balance sheets a lot of provisions, hence losses are still largely owed to this high level of unpaid loans. Since 2008, Romanian banks have externalized many NPL portfolios to debt recovery agencies, but about 6.8 billion Euro worth of NPLs still remain within the system.
Romanian banks will sell in 2015 an overall 2.5 billion Euro worth of NPLs to debt recovery firms, and another 4-4.5 billion Euro during 2016, according to analysts.
Meanwhile, the EC has issued the new Directive 17, which will bring in new rules for real estate lending and debt recovery. Under the document, foreclosures and property auctioning will be restricted, becoming more difficult to execute as indebted consumers can now protect themselves via an insolvency-like procedure. Also, the net income and the housing needs of the indebted will be subject to human rights criteria, meaning banks and debt recovery companies will execute real estate assets more forcefully and will retain less income at source.
"The financial crisis has shown that irresponsible behaviour by market participants can undermine the foundations of the financial system, leading to a lack of confidence among all parties - in particular consumers - and potentially severe social and economic consequences. Many consumers have lost confidence in the financial sector and borrowers have found their loans increasingly unaffordable, resulting in defaults and increased forced sales," explains Directive 17 in its motivation preamble.
"As a result, the G20 has commissioned work from the Financial Stability Board to establish principles on sound underwriting standards in relation to residential immovable property," states the document.
But the Directive, which will introduce new, gentler rules about foreclosure, might not change much, as it will not be applied retroactively, bankers say. If debt recovery agencies foreclosed properties in a wild and unregulated manner up to now, that will change, but only with contracts formed after March 2016, bankers explain.
Meanwhile, the insolvency procedure recently introduced by a new law that came into effect this year may bring relief to the indebted, and the asset liquidator might be forced to wait up to four or five years to execute the real estate property in question. Another method to solve the unpaid debt crisis is through mediation.
"From my experience, the mediation process does not work. Assets under a NPL history longer than five years have little chance of recovery. In developed countries, mediation works fine, and only 20 percent of the cases open the insolvency procedure, and that with the agreement of 55 percent of the creditors", says Stan Tirnoveanu, senior partner of Zamfirescu Racoti & Predoiu.
The banking system has still many gaps, and citizens do not know how to protect against banks' abuse. Many were forced out of their homes, after losing the capacity to repay their loans. Now, the new legislation will take into account more humane actions, such as ensuring a reasonable level of living, including shelter.
In Romania, a country where the majority of the population is financially illiterate and where the banking-intermediation ratio is three times less compared to the EU, the population hardly know where to complain about the banking services.
According to the National Consumers Protection Agency (ANPC), only about 3,100 complaints were registered up to the present, (January-September 2015), out of which 751 were admitted and only 129 have been amicably mediated with the plaintiffs withdrawing their complaints.
To increase the mediation level, banks and the Authority decided to create a new National Litigations Solving Centre, (CNSL), which sources told The Diplomat – Bucharest may be opened at the beginning of next year.
As ANPC president Marius Dunca says that the new centre will help banks regain consumers' trust, he also adds: "I don't want to hear about huge profits made by bankers on the backs of Romanians".
But even if the new CNSL may hope to solve foreclosures via mediation, without new amendments brought to the legislation its force will be dim, says Adriana Ahciarliu, general secretary of the leasing union ALB Romania.
"Without amending the mediation laws, this sub-authority (CNSL-e.n.) will not have much power, and the cases will end up in court," says Ahciarliu.
Tirnoveanu of ZRP is yet more pessimistic: "I don't think mediation fits our local philosophy", he says, while Ahciarliu also thinks there are no clear rules yet clearly dividing "trust" and "regulations". Many cases depend on bona-fides, and goodwill may be hard to find these days with insolvent clients.
But as Oana Petrescu, partner with Deloitte and executive director of one of the two local bankers' associations (Council of Bankers Employers in Romania) says, "the simple fact that we have an exhaustive public debate on Directive 17 is a dramatic leap forward". That, as compared to the lack of public consultation when the previous banking rules were introduced by the 2010 Emergency Ordinance 50... issued, according to sources, in between Christmas and New Year's Eve.
But when will Directive 17 come into effect and whether or how much it will succeed in protecting bankrupt indebted locals is yet to be seen.