Causes underlying the weak entrepreneurial footprint have to be removed

(Opinion by Gabriela Folcuț, Executive Director, Romanian Association of Banks)

The causes underlying the weak entrepreneurial footprint, i.e. merely 29 SMEs for one thousand inhabitants alongside the precarious soundness of some Romanian companies, have to be removed, especially during this pandemic and economic context. The domino effect across companies brought about by distortions in the economy caused by the COVID-19 pandemics is one of the potential risks. Statistics show us that the solvency ratios of non-financial companies have already deteriorated. The immediate impact of the difficult collection of company receivables translates into default risk and, when it comes to banks, we are in the presence of the risk of having more NPLs. Anyway, bankers monitor very carefully credit risk and legislative risk as well.

The companies use commercial credit which represents 18.4% of their liabilities. Funding via loans from banks and non-banks has a weight of 8.4% in companies’ liabilities. Nonetheless, the representatives of the business environment mention that access to funding is one of their less pressing problems. In a top-three really pressing problems for companies, we find production and labour costs, the availability of skilled labour and the absence of demand.

The NPL rate for corporate lending dropped to 7.4% but the expectations regarding non-performing corporate loans are that they will go up. The end of the period in which payment obligations are delayed (the end of this year) puts into a new perspective credit risk in 2021. 28% of the total 100,000 companies that were granted bank loans have opted for the moratorium. Everything depends now on the manner in which the companies affected by the pandemics effects will manage, during this grace period, to readapt their business where possible, so as not to incur liquidity problems.

Although it went down, suppliers’ payment term is still long, i.e. 119 days. Receivables collection takes 84 days. The law says that payment terms cannot be longer than 60 calendar days. An element which could generate a negative development is generated by the short maturity of debts (64%) and of bank corporate loans. The data shows that about 41% of the current portfolio of loans granted to non-financial companies have a residual maturity of up to 1 year. In Romania, merely 15% of companies comply with the conditions necessary in order to be granted bank loans.

The official data published by the central bank shows that, in the real economy, the companies with negative capital represent 42% of total companies, that they hire 15% of employees and contribute with 7% to the GVA.

Currently, Romania has about 35,000 insolvent companies. This figure was reported before the effect of the healthcare crisis. The figure is not high if we are to compare it with the figure of a decade ago when 1 in 10 companies was insolvent but, nevertheless, we incur the risk of reaching a higher figure during this period of crisis. Moreover, the inefficiency of the insolvency proceedings should make public authorities ponder over this issue. In Romania, 90% of the companies under insolvency proceedings have failed. Only 2% managed to escape deregistration while 1% were under reorganization. The figures mentioned refer to the last 12 years.

As regards profitability, the corporate sector outperforms the banking sector. In the corporate sector, in the first half of 2019, ROA and ROE stood at 16.6% respectively 6.5%. In the banking  sector, ROA and ROE stood at 1.21% respectively 11.28% in mid-2019. Contemplating the payment obligations’ delays for a major weight of corporate and household lending, in mid-2020,  ROA and ROE dropped to 1.08% and 9.81% respectively.

In Romania, lending to the private sector as weight against the GDP stood at merely 25% in March 2020, the lowest rate across the European Union Member States. A possible explanation is, among others, the mirror of real economy already mentioned. Despite the current context, banks have continued to expand their lending during the pandemics and they will continue to grant loans to the companies which can reimburse them.