Rocketing consumer credit across central and eastern Europe has sparked alerts at central banks concerned that borrowers unused to taking on debt may be vulnerable to economic swings.
Rapidly developing financing industries, plummeting borrowing costs and buoyant economies have created ideal conditions for credit booms across countries as diverse as Romania, Latvia and Kazakhstan. All three nations saw household debt jump by an average of more than 60% annually in the five years through 2004, with Romania’s rate averaging about 95%.
“The long-term growth in credit is something we look forward to ... what we’re concerned about is the speed of the process from A to B; that’s been excessive,” the country’s deputy central bank governor, Cristian Popa, told Emerging Markets.
Popa said foreign exchange lending, spurred by the interest differentials between east and west, has been a particular concern in the past, though domestic lending is now starting to cause unease. Authorities in Poland are similarly monitoring the popularity of Swiss franc borrowing, which accounts for more than 50% of some banks’ mortgage books.
“It’s very important that each household should understand what the potential risks related to these kinds of loans are,” Poland’s deputy central bank governor Jerzy Pruski said in an interview with Emerging Markets. The danger is not an immediate one, but policy-makers are determined to prevent negative developments, he said.
Credit ratings agency Fitch last week drew attention to the “eye-popping scale” of bank credit growth. “If these trends were to continue, they could outweigh other positive dynamics and start to exert downward pressure on creditworthiness,” the report warned. Fitch noted that while the domination of foreign banks has brought technology and techniques that mitigate credit risk, the arrival of competition from abroad has also led to an expansion drive in a bid to win market share.
Istvan Hamecz, chief economist at Hungary’s central bank, says he’s watching the evolution of credit but is sanguine about the current situation. A report due to be published by the bank in the coming weeks will fit with previous studies, suggesting there isn’t as yet a credit problem in the eastern European Union, with the possible exception of the Baltic states, Hamecz said.
Further east, where markets are much less developed, rapid credit growth is more problematic because of the absence of reliable credit-scoring systems. In Russia credit bureaux are handicapped by banks’ unwillingness to share “positive information” about customers with solid repayment records because they fear such accounts will be poached by rivals.
At the same time, a proliferation of store financing, sometimes at rates as high as 60%, could create levels of bad debt with repercussions across the board. “We have to be concerned that everyone is engaged in responsible lending,” Lou Naumovski, general manager for Russia and the CIS for Visa International, told Emerging Markets. “Some of these interest rates are unsustainable, and it backs up the assertion that there could be a credit crunch coming.”