Controlling an explosive credit boom has been the top priority again in Sofia recently, with the country's central bank moving to place new restrictions on lending. Yet these efforts have met with mixed reviews in the business community.
On November 10, the Bulgarian National Bank (BNB) announced updated rules for the issuing of credit, changes which reflect the central bank's continuing efforts to slow credit growth for 2006 to less than 20%.
This would mark a significant decrease from the rapid annual growth experienced from 2001 to 2004. During the four years of this period, annual credit growth was 26.3%, 37.2%, 39.5% and 40.4%, respectively.
Athanasios Koutsopoulos, the general manager of Piraeus Bank, told OBG this week that controlling this expansion was "a critical issue".
"The central bank must control retail credit growth, but not corporate credit growth," he said. "It must not be too restrictive because we need to support the growth that is necessary for sound entry into the EU."
Koutsopoulos went on to point out that despite this rapid growth, individual loans still made up only 7% of GDP, compared to 50-55% for many EU countries.
The central bank's new rules modify the existing guidelines for the evaluation and classification of risk exposure, as part of an effort to maintain the quality of consumer and mortgage loans.
The new rules specify that banks will have to provision 20% of the loan amount if a consumer loan has been placed under the "watch" classification - a status received when repayments are 30-61 days past-due. This provision is double the previous requirement of 10%. For payments that are 62-90 days past-due, the required provision increases between 50 and 75%.
The updates also modify the minimum required reserves held by banks for the beginning of 2006. The amendment imposes a graduated system of penalties on banks which exceed growth limits set by the central bank.
Currently, there are quarterly limits of 5% growth, half-yearly limits of 12.5%, nine-month limits of 17.5% and a yearly limit of 23%. Banks that exceed the growth cap by less than 1% must remit double the amount exceeded to the central bank. Breaches of 1-2% will be subject to the remittance of triple the amount, while a breach of over 2% will warrant the remittance of quadruple the exceeded amount.
These measures are intended to stave off some of the potential risks that rapid credit growth poses to macroeconomic stability.
One such risk is that increased credit availability eases constraints on households and firms, leading to greater consumption and investment. This in turn increases credit-financed domestic demand, therefore pushing up prices in asset, goods and labour markets. At the same time, demand for foreign goods may rise and cause a further widening in the already deteriorating trade balance. As a result of these events, domestic wages and prices could increase - at the cost of reducing international competitiveness and increasing external vulnerabilities.
The International Monetary Fund (IMF) has established several criteria, many of which Bulgaria meets, which indicate when an economy is in the midst of a credit boom and is susceptible to its related dangers. Some of these indicators include the rapid expansion of credit to households coupled with a decrease in loans to state-owned enterprises (SOEs), and widespread lending in foreign currencies to the service and industry sectors.
According to a 2005 IMF report, household credit as a percentage of GDP increased by 1.4% in 2002, 3.2% in 2003 and 4.9% in 2004. In addition, real credit growth of foreign currency increased at rates of 61.8%, 42.1% and 57.3% for the same years. The report also documented that the service and industry sectors in Bulgaria made up 95% of credit in 2002, 94% in 2003 and 92% in 2004. All these factors point to a continued and substantial credit boom.
Yet while unchecked credit growth produces substantial risks, some believe that restrictions on lending can be an unnecessary burden on the sector.
Executive Director Andrei Evtimov of Doverie Capital told OBG that the banks themselves are capable of regulating credit growth without governmental controls.
"Most major banks in Bulgaria are privatised and have their own procedures and internal controls," he said. "They should be able to control credit expansion in an effective way. The central bank shouldn't have to introduce additional requirements."
Critics also point to a similar round of tightening of reserve requirements in 2004, which had limited effects on credit growth rates at that time.
However, through its November 10 announcement, the central bank has once again demonstrated its commitment to controlling credit growth rates. How effective the measures will be though, remains to be seen.