THE banking system has reached the limits of its credit risk management capacity, inviting stricter capital and liquidity measures to reduce credit growth, Bulgarian National Bank (BNB) report on the state of the banking sector by mid-2004 shows.
The report was published on November 8.
The conducted 'stress tests' have revealed that under the best case scenario for the deterioration of loan quality, the capital adequacy of 19 of the country's 35 banks would fall below the law-prescribed 12 per cent if the provisioning requirement for performing credits is five per cent and 30 per cent for monitored loans. Four of the banks would even have a negative capital adequacy.
The sector's rate of return sunk to 2.38 per cent by end-June versus 2.95 per cent a year earlier. Seven banks have a rate of return lower than one per cent, while four have a rate of less than 0.41 per cent.
Despite the central bank's warnings, most of the local banks have thrown caution to the wind in an attempt to lend their way up the market rankings. Data of the central bank shows that domestic credits increased by 441.5 million leva in September after the much lower figure of 156 million in August. The total amount of credits in the country reached 12.433 billion leva.
According to preliminary data provided by BNB, October will also mark a jump by around 420 million leva. Experts are discussing the possible implementation of the measures for reduction credit expansion rate that were previously contracted with the International Monetary Fund under its memorandum with BNB.
As of December 1, the minimum obligatory reserves of banks on Repo deals (short for repurchase agreements - contracts for the sale and future repurchase of a financial asset, most often treasury bonds) and deposits for two and more years should be raised by additional four per cent. As of January 1, 2005, half of any bank's cash money will be deducted from calculations for the minimum required reserves.
The effect of these measures will not be very strong and it will become visible as early as the end of January 2005, experts said. Bank system liquidity will therefore decrease by another 200 million leva. The IMF and BNB are targeting credit growth to be reduced to between 30-35 per cent by the end of the year.
The report was published on November 8.
The conducted 'stress tests' have revealed that under the best case scenario for the deterioration of loan quality, the capital adequacy of 19 of the country's 35 banks would fall below the law-prescribed 12 per cent if the provisioning requirement for performing credits is five per cent and 30 per cent for monitored loans. Four of the banks would even have a negative capital adequacy.
The sector's rate of return sunk to 2.38 per cent by end-June versus 2.95 per cent a year earlier. Seven banks have a rate of return lower than one per cent, while four have a rate of less than 0.41 per cent.
Despite the central bank's warnings, most of the local banks have thrown caution to the wind in an attempt to lend their way up the market rankings. Data of the central bank shows that domestic credits increased by 441.5 million leva in September after the much lower figure of 156 million in August. The total amount of credits in the country reached 12.433 billion leva.
According to preliminary data provided by BNB, October will also mark a jump by around 420 million leva. Experts are discussing the possible implementation of the measures for reduction credit expansion rate that were previously contracted with the International Monetary Fund under its memorandum with BNB.
As of December 1, the minimum obligatory reserves of banks on Repo deals (short for repurchase agreements - contracts for the sale and future repurchase of a financial asset, most often treasury bonds) and deposits for two and more years should be raised by additional four per cent. As of January 1, 2005, half of any bank's cash money will be deducted from calculations for the minimum required reserves.
The effect of these measures will not be very strong and it will become visible as early as the end of January 2005, experts said. Bank system liquidity will therefore decrease by another 200 million leva. The IMF and BNB are targeting credit growth to be reduced to between 30-35 per cent by the end of the year.
