(source: ČTK)
THE GLOBAL economic crisis strongly affected Slovakia’s small, open economy. Slovak manufacturers, who typically export a large proportion of their production, were left without new orders, but with old loans. As a result, the volume of bad loans increased markedly. In response to worsening payment discipline by clients and the negative economic outlook, banks tightened requirements on businesses seeking new loans, leading to growing dissatisfaction among businesses and complaints that they were being denied access to financing. The volume of business loans provided decreased during 2009, something which banks attribute in part to a decline in demand from companies. However, the latest signals from the business sector suggest a revival.
The share of bad loans, mostly those loans in which a borrower is more than 90 days late with payments, rose more significantly in the corporate sector than among households last year. While the share of bad loans in the business sector rose from 3.32 percent in January 2009 to 6.72 percent in December 2009, the rate in the household loan segment reported an increase from 3.99 percent in January 2009 to 5.04 percent at the end of 2009, the Slovak Banking Association states on its website, citing preliminary data from the National Bank of Slovakia (NBS). As a consequence of growing unemployment the association now expects bad household loans to increase more significantly than those provided to companies.
The central bank ascribes the growth in failed loans to the economic crisis.
“The financial position of companies has worsened,” said Marek Ličák, the head of the risk analysis department at the NBS, as cited by the ČTK newswire. “A bigger number of companies have had problems with paying back their loans.”
In total, businesses borrowed from banks more than €7.8 billion in new loans last year. Compared with 2008 this was a drop of 15.7 percent. In the case of households, the volume of new loans shrank by 20 percent, with housing loans declining the most. The total volume of bank loans taken by corporate entities decreased by 3.3 percent during 2009 to €14.53 billion.
According to the central bank’s analysis of the banking sector in 2009, financing decreased especially in export-oriented sectors and sectors with a significant drop in sales. Thus banks, behaving more prudently, curbed financing, especially in the sector of trade, the machine industry and transport. On the other hand, financing of activities in real estate and the construction sector rose last year; the central bank ascribes this increase to projects which were already under way.
But as the central bank notes, a relatively significant drop in demand from businesses for new loans also contributed to the drop in the overall volume of loans. The slowing decline in demand for loans may indicate an improving situation in the corporate sector.
Tightened standards
Banks tightened lending standards throughout last year in line with the worsening economic situation. These stricter conditions took the form of higher interest margins, firmer requirements for loan guarantees, and others. The tightening of standards eventually slowed and most banks do not plan any more, saying they should remain unchanged during the first half of 2010. But no relaxation of standards is expected in the near future, according to the NBS.
“Conditions changed especially in the context of the current development of the economy,“ said Andrej Mikloš, the head of the corporate loans department at Slovakia’s biggest bank, Slovenská Sporiteľna (SLSP), adding that clients have felt a tightening in terms of higher loan guarantee requirements, while higher risk can also be reflected in the interest rate. “Firms which are applying for a loan should have a clear strategy, demonstrate stable performance, and support their business plans with concrete orders. Equally, they should be able to pay back their obligations and, depending on the kind and volume of financing, have at their disposal a loan guarantee acceptable to a bank.”
According to Mikloš, the measures have particularly affected those sectors most influenced by the crisis.
Among these he listed transport, production of furniture, clothing and footwear, construction, sale of cars, leasing and others. But he said his bank responds flexibly to macroeconomic developments and changes on the market.
Tatra Banka, when assessing applications for loans, started focusing its attention on the information provided and expectations.
“Terms for provision of a business loan have not changed fundamentally, i.e. the scope of documents required by the bank from a client remained the same,” Boris Gandel, Tatra Banka’s spokesperson, told The Slovak Spectator. “We put stress on the quality of the information submitted, and whereas in the past stress was laid on the past results of the company and expectations were rather positive because of the expected economic growth and consumption, for the time being the main stress is put on future expectations and the best solution is when these are supported by existing contracts.”
Interest rates on new business loans have decreased since the start of 2009. The central bank puts this in line with the development of rates on the inter-bank market.
“This trend halted only in October and November 2009,” the central bank’s analysis reads. “This indicates completion of the transmission of changes in ECB basic interest rates to client rates. Thus interest rates during the last few months of 2009 reached the lowest levels and we do not expect them to decline further.”
Hopes for revival in corporate loans
“We expect that the revival in business lending in 2010 will be more visible than in the case of households,” said Gandel of Tatra Banka. “In particular, low demand from companies themselves and partly also tightening of standards by banks was behind the drop in corporate loans last year. The total volume of loans provided to legal entities started to decrease in February 2009 and was at the September 2008 level in December.”
Most business loans are for short terms, up to one year, and their volume is closely linked with the volume of production or sales, according to Gandel. This is why the fall in production and sales in 2009 was so visibly reflected in the lower volume of loans.
“In 2010 we expect a revival in production and thus also an increase in demand for loans from companies,” said Gandel. “Especially during the second half of 2010 we expect a positive development in the segment of financing. We anticipate a higher demand for loans especially from production companies, firms active in the energy sector and from administration companies for reconstruction of apartment buildings. But the growth of most sectors is conditional on an increase in trust and, later, consumption in EU member countries. Thus it is too early to speak about volumes.”
Assessing the current demand for business loans, Mikloš of SLSP said that demand for loans from large corporate entities was slightly up at the end of Q1 2010 compared with the lower demand in 2009.
The view of businesses
Businesses have regularly reported worsening access to financing in various surveys by the Business Alliance of Slovakia (PAS) since the end of 2008.
“About 12 percent of businesses said that loans became inaccessible,” Robert Kičina, executive director of PAS told The Slovak Spectator. “Tighter terms for provision of loans and higher rates increased costs in the business sector.”
The latest Business Environment Index shows a negative trend persisting in terms of access to finance.
“The index has not indicated so far a significant turnabout, but the truth is that the world economy has been showing signals of gradual revival, which will gradually transfer also into the financing sector, where it is possible to expect softening of terms and a drop in rates,” said Kičina.
