BULGARIAN National Bank (BNB) announced a new set of measures for further curbing this countrys credit growth on November 10.
The central bank said it would further tighten its minimum reserve requirements for the most aggressive lenders, in another attempt to slow the growth in credit extension, which threatens the countrys current account deficit.
BNB will introduce a progressively increasing amount of supplementary funds that commercial banks will have to keep in addition to their minimum reserve accounts. The additional reserves will be tied to the volume of loans extended, in order to discourage growth in lending.
The central bank has planned to limit annual growth of bank lending to 30 per cent this year and 20 per cent in 2006. Bulgaria ended 2004 with a lending growth of about 50 per cent, which was a reason for a serious criticism from the International Monetary Fund (IMF).
Several banks had maintained their strategy of expanding their market shares in lending and using cheap foreign financing, BNB said in a statement, and added that such a credit policy created conditions for significant rise in lending above the planned pace of growth.
Under the upcoming regulations, to become effective from the first quarter of 2006, banks will have to increase their minimum reserves, depending on the pace of lending growth above a rate set by the central bank.
If lenders exceed the quarterly lending growth limits by up to one percentage point above the five-per cent barrier set by BNB, they will have to deposit additional cash reserves equal to twice the amount by which they exceed the quarterly lending growth limits.
Commercial banks, which exceed the barrier by up to two percentage points, will have to deposit additional cash reserves equal to three times the amount by which they exceed the limits. Banks will deposit four times the amount by which they exceed the limit set by the central bank if their quarterly lending growth tops seven percent.
Currently the central bank has set the quarterly limit on credit growth at five per cent, the half-yearly at 12.5 per cent, the nine-month at 17.5 per cent and the annual at 23 per cent.
The central bank also raised the provisions for consumer and mortgage loans by between 10 and 25 percentage points.
The BNB measures for curbing credit growth will not apply to corporate lending.
The new rules will be the latest in a series of measures adopted by Bulgarian authorities since July to tighten reserve requirements in response to pressure from the IMF.
The previous tightening applied to all banks, which now have to meet an eight per cent minimum reserve requirement. Furthermore, the cash deposited in their vaults and ATM machines is no longer recognised as minimum reserves.
Lending growth in Bulgaria fell to an average of 39 per cent at the end of August, from about 50 per cent at the end of 2004, as a result of the series of restrictions recommended by the IMF and imposed by BNB.
The IMF expects Bulgarias current account deficit to reach the record 13.5 per cent of GDP at the end of this year versus an initial forecast of 7.6 per cent of GDP, which is envisaged in the countrys agreement with the Fund.
The new measures were met with pessimism by both analysts and bankers immediately after their announcement.
The independent consulting company Industry Watch said in a comment published on November 11 that the new set of requirements would hardly have any serious effect on the demand for credits, which, according to them, was influenced by strong structural factors. Among the factors the analysts listed were macroeconomic stability, the increase in incomes and employment and the expectation for an upward trend in the prices of real estate, as well as the developing construction.
The dynamics of private sector lending in the past two quarters of 2005 showed that it is highly possible that credit expansion would be delayed by the end of the year and drop to about 30 per cent, Industry Watch said. Its experts have calculated that the pace of growth equalled 37.5 per cent at the end of September.
The company said the main engine of credit growth was consumer credits. At the end of September, corporate credits growth was just 25.4 per cent year-on-year (with 42 per cent at the same time last year).
The measures BNB adopted were a natural continuation of its efforts to limit credit supply, said Bulbank executive director Levon Hampartzoumian. In his view, the new minimum-reserve barrier will make it harder for banks to evade the restrictions.
Peter Harold, executive director of HVB Bank Biochim and Hebros Bank, however, said it was too early to introduce new measures before seeing the effects of the previous ones. He believes that the July restriction have led to some results, because BNB reports show that banks have almost reached the 30-per cent growth wanted by the central bank.
