Demand for loans is weak and poor quality: EIB
Banks in Eastern Europe face poor quality demand, with customers mostly interested in renegotiating loans, a survey shows
Lending in Central, Eastern and South-Eastern Europe has remained sluggish over the past six months while demand for bank loans, both from companies and from individuals, is weak, a fresh survey by the European Investment Bank (EIB) among banks in the region showed.
The survey of 13 big banking groups and 73 banks that was carried out in April covered 50% of the banking assets in the region, with the degree of coverage rising to 70% or 80% in some countries.
The survey showed that the banking sector is not really intermediating resources. There is no lending going on, Debora Revoltella, head of the EIBs economic department, told Emerging Markets.
One of the reasons for this is the low demand. Not only is demand very weak but its also poor quality, Revoltella said, adding that most requests for loans were for refinancing previous loans on more advantageous terms. [Demand] is not for investment purposes, its not for M&A, its not for other activities - its renegotiation of loans, she said.
On the supply side, the factor that was considered as the most likely to limit lending activities was the quality of the existing credit portfolio, the survey also showed. [The banks] are worried about non-performing loans in the subsidiaries and at parent company level and this is constraining their ability to lend, Revoltella said.
She said this was very important from a policy point of view because it indicated to governments that they had to put in place policies that created the right incentive to solve the non-performing loans problem.
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This can be done by removing technical impediments to getting rid of non-performing loans, such as fiscal considerations or complicated legislation regarding real estate collateral, and by speeding up trials through courts. All these things have to be done at institutional levels, not necessarily at the single bank level, she said.
Regulation was also highlighted as another important constraint on the supply of credit by banks in the region, the survey showed. The tightening of regulation, Basel III and regulation put in place by some of the central banks are considered to be restrictive by the banks, Revoltella said.
While funding from parent banks to subsidiaries is declining, the banks are optimistic about raising deposits on the local markets, according to the survey. Deposits are likely to come from corporations and individuals in the respective countries but funding is also likely to come from international financial institutions.
Most banks in the survey said they were committed to Eastern Europe but some have become selective in their strategies. Before the crisis, banks were putting flags in the countries, a matter of saying we are present there, Revoltella said. Now theyre starting to look at the market potential and theyre starting to look at their own subsidiaries in the region.
You need a minimum scale to be really profitable. Poland is one of the markets highlighted as having big potential by the banks in the survey, which are concerned by Slovenia and Hungary, where some deleveraging took place in the past few months.
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