Greedy banks stifle businesses by not offering loans at affordable rates. Similar tales, and even in more outspoken versions are flooding the internet.
The fact is that for the first time, since the dawn of democracy in Bulgaria (1989| today we are witnessing a credit collapse. The sad statistics of the National Bank shows that for the two months of the year, the total amount of credits decreased by 430 million levs endash down from 56.59 billion to 56.16 billion levs. What is more, the fall is due mainly to the reduction – by 373 million levs endash of the volume of loans to businesses. Which explains their complaints that small and medium-sized companies do not have access to finance. For this unfavourable trend many explanations have been heard – the credit was expensive, banks asked for prohibitive collateral, owners and managers of companies are worried that interest rates are likely to rise, and so on.
However, the comparative analysis of data periodically published by the Central Bank shows that the reason for the credit downturn cannot be related to the cost of credit.
The information on
interest rates on new loans
for businesses shows that credits denominated in euros and U.S. dollars have never been cheaper. The average rate of interest on local-currency loans to companies at the end of February was 6.99% per annum. Two months earlier levels were about 7.2 per cent. A year ago, their size was 9.63%. Compared to the end of 2008 – the last year before the crisis – the average interest rate on bank loans to businesses was more than 12% annually.
The implication is that interest rates are not higher, but on the contrary endash they experience a constant decline. Another issue is that to some people a contraction in lending rates for businesses by more than a quarter is not enough. However, this reduction applies not only for BGN loans, but for those in euro and U.S. dollars.
It is true that in this case the question is about average interest rates. This means that for some companies, they can be lower, while for other ones endash much higher. But these differences exist not only in the Bulgarian banking sector, but also in other part of Europe and also worldwide. Companies with high turnovers, and a lot of capital, secured market position and a long credit history have always been the preferred customers and are able to rely on loans with lower interest rates.
Smaller companies and those in poor financial condition with no large cash turnover and often lacking preliminary marketing agreements pose a risk of irregular servicing their obligations to banks and therefore they are offered higher rates.
The next
big problem for companies is the collateral
that they are asked to have in order to get crediting.
Many of the executives and owners of companies believe that it is enough to offer many guarantees at a high price to get the desired loan. Businessmen often complain that they were willing to mortgage apartments, land, industrial buildings, and even establish a special pledge on the companyrquote s property and again their request for a loan is rejected. This scheme of providing guarantees may only work if and only if the bank believes that the value of the pledge exceeds by at least 50% that of the loan amount. But even then inspectors would hesitate to extend a credit if they are unsure that the company will operate at a profit.
Experts confidently say that the first thing they look at when approving a loan is whether the company’s earnings will be sufficient to finance its business and pay its loan. The best security is considered a lien on receivables from traditional customers of the company with which it has signed contracts to supply goods and services. If these two conditions are met, a company may be sure it will get the loan, and that – at an affordable price. But most companies in the country, especially small and medium-sized ones as well as those who are just beginning to operate can hardly accommodate these requirements.
I have a good business idea, but the bank does not want to support it, young people often complain. The problem is not the conservatism of the loan officers at the bank. Rather, the problem is that the loan applicants often fail to prove to creditors that their idea will bring enough income to repay the loan they want. The beauty of the idea is not so important to the bank, what is more to the point is the future financial performance. As for the collateral in the form of houses and apartments, they are no longer sufficient for the granting of such a loan. Banks are not happy to see their clients broke and take their property. In the years of the crisis, the banks became flooded with property mortgages.
Banks are greedy
and do not want to share the risk with its customers is another cry that is often heard in public. This could means that credit institutions do not want to say goodbye to some of their profits by reducing borrowing costs and thus alleviate the situation of the borrowers. The decreasing of the interest rate has already been mentioned. But there is another important indicator that credit institutions very carefully monitor. And this is the so-called net interest margin endash the interest income that banks receive less interest costs they pay. For the past four years this has shrunk from 5 or 5.5 to 3.3-3.5 percent. This indicates that credit institutions in fact have lost part of their revenue. In other words, they voluntarily or under pressure of circumstances have shared some of the risk with their borrowers. This is evident from the comparative figures for net interest income of the banking sector. In February 2013 this sum was 400.2 million levs, while a year earlier the sum came to 441 million levs.
The BANKER
