The Romanian banking system

The Romanian banking system will again report profit as of this year, but the level will be lower than in most Central European countries, a survey conducted by Deloitte shows. The survey also indicates that the banks based in Romania will try to maximize their net profit, laying special emphasis on the efficient management of non-performing assets. Last year, for instance, the overall losses incurred by the Romanian banking system stood at approximately one billion Euros. The system made profit in only two of the past six years.

“The total volume of losses stands at 1.6 billion Euros. The losses would have weakened the system if the banks hadn’t made consistent efforts, but the Supervision Department of the National Bank of Romania has permanently monitored the system and managed to generate an irreversible capital inflow, provided by shareholders, the actual supporters of the losses,” the first deputy governor of the National Bank of Romania, Florin Georgescu, said. He pointed out that bank shareholders had brought in some 1.8 billion Euros in the past 4-5 years, exceeding the overall volume of the net losses registered since the start of the crisis.

Adding up are loans of over 400 million Euros due to be repaid in 2 years’ time. “The system is solid thanks to great efforts from the banks and owners to preserve the quality of the banking sector at an appropriate level. Those costs have been taken on by shareholders”, said Florin Georgescu. On the other hand, in the opinion of the National Bank governor, Mugur Isarescu, the three trends facing the banking sector are a slight increase in lending, the quality of credits and a greater importance attached to funding from local sources. Let us note that, in the first ten days of May, the National Bank decided to cut the monetary policy interest rate from 2% to a new historic low of 1.75%. Mugur Isarescu recommended to banks to be cautious when cutting deposit interest rates because they would need money as year lending picks up:

Mugur Isarescu: “When it comes to deposits, my opinion is that some banks lowered interest rates more than they should have, but they do have an excess of liquidity. Now they must be cautious, they should not see today’s excess of liquidity as something that is going to last. As credits in lei increase, this excess will be absorbed. Other banks were more cautious, deciding to maintain their interest rates at above 2% and we appreciate their vision.”

Of Romania’s 40 banks, only four smaller ones still have interest rates on deposits of 3% or higher. Besides slashing the monetary policy interest rate, the National Bank has also decided to decrease the minimum obligatory reserves for lei from 10% to 8%. Economic analyst Radu Craciun explains:

Radu Craciun: “Indeed, both measures are characteristic of monetary policy relaxation. The purpose is to make the leu currency cheaper and to also increase their number. Cutting the banks’ obligatory reserves will bring an extra liquidity on the inter-banking market of about 3 billion lei or 675 million Euros, which the banks will have to put to work.”

The banking system has contributed to Romania’s economic growth but its impact on the GDP has been curtailed by the companies’ lack of budgetary discipline and the uninspired allocation of funds at bank level, reads a survey conducted by the Deloitte consultancy firm and commissioned by the Council of Bank Employers in Romania. The institutional fragility of the banking system and the economy as a whole has entailed a less performing lending activity, which has been covered by the shareholders’ financial support. According to the survey, lending money to companies will be on an upward trend this year, after a constant decrease in the past three years. Professor Daniel Daianu, a member of the Central Bank’s Board, says that Romania has reached an economic growth rate close to its current potential of 3%, due to an additional liquidity on the market after the recession period:

Daniel Daianu: “Overcoming deep recession either in Latin America, in Asia or in Europe, implied economic recovery without the need for exceptional crediting. Why? Because there is liquidity in the economy and the unused liquidities, once starting being used, will get the economic engines moving. There is one more thing in the case of Romania, which cannot be found in other countries in Central and Eastern Europe, namely that despite the tight budget execution, economic growth was reported. So this is one further argument: the economy, once out of recession, and if there is liquidity in the system, can get moving for a while.”

Daniel Daianu warns, however, that on medium and long terms, you cannot separate economic growth from bank loans, because in Romania the capital market is insufficiently developed and cannot fulfil its role of funding alternative to bank loans.