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Companies suffering credit crunch

Despite a continuing fall in the yields from government papers, banks are still stifling corporate sector growth with a continued reluctance to lend to domestic firms, giving small and medium enterprises and start-ups little or no chance to make an impact on the economy and fuel competitiveness.
While interest rates on the Slovak money market have dropped over the past month to between 8% and 10%, and the maximum yield on state bonds has fallen below the 10% mark, the latest figures from the central bank show that new loans to the corporate sector have grown only 200 million Slovak crowns ($4.7 million) during the first two months of the year from a total loan figure of 375 billion crowns ($8.9 billion).


Banks such as Československá Obchodná Banka (shown here on SNP námestie in Bratislava) are reluctant to give loans to small and medium sized enterprises.
photo: Vladimír Hák

Despite a continuing fall in the yields from government papers, banks are still stifling corporate sector growth with a continued reluctance to lend to domestic firms, giving small and medium enterprises and start-ups little or no chance to make an impact on the economy and fuel competitiveness.

While interest rates on the Slovak money market have dropped over the past month to between 8% and 10%, and the maximum yield on state bonds has fallen below the 10% mark, the latest figures from the central bank show that new loans to the corporate sector have grown only 200 million Slovak crowns ($4.7 million) during the first two months of the year from a total loan figure of 375 billion crowns ($8.9 billion).

"The banks are basically still not giving any loans to companies. They are very conservative and not much help to domestic firms," said Karol Balog, head of the Agency for Industrial Development and Revitalisation. "Banks won't give any loans to new companies unless they have buildings or land as collateral. The companies can't get any cheap money really. Interest rates on loans are still at least 18 - 19%," he said.

Heads the Slovak corporate sector and international financial institutions have long been lobbying the banks themselves to take a less restrictive stance with extending credit to companies, especially small and start-up companies. The International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OSCE) and World Bank (WB) have all pointed to the need for Slovakia's corporate sector to become more competitive.

However, this current bank policy towards the extension of new credit lines means that the necessary entry of new domestic firms onto the market to boost competitiveness is being severely curtailed. Balog added that at present he saw little chance of a change in this approach.

"I'm not very optimistic that there will be any end in sight for this," he said, adding: "But, there is a hope for the firms in liberalisation of the banking sector, and getting foreign direct investment into Slovakia."

With a possible $400 million loan from the World Bank for corporate and bank restructuring potentially around the corner (see story page 6), commercial banks will be expected to begin playing their role in getting the corporate sector up to standard as Slovakia attempts to fulfil European Union convergence criteria.

"There will have to be a change in the loan policy of banks," said Ivan Chodák, analyst at CAIB Securities in Bratislava. "Banks used to make a lot of money on risk-free high-yield bonds from the government, but the yield is going down and expected to be small in the future. If the banks want to make a profit they are going to have to start giving loans to companies."

While it is unlikely that there would be a sudden loan boom, banks are likely to begin moderately increasing the volume of their corporate loans. Chodák said that the future policy would likely involve banks being selective in who they give loans to, especially with past experience born in mind.

"Banks have learned from the past," the analyst said. "They are only going to give to good companies. After all, banks are not giving out social security - this is a business."

Few domestic banks seem eager to embrace this new approach immediately, however, despite the obviously unsustainable position of not issuing loans when rates on bonds are dropping.

Všeobecná úverová banka (VÚB), one of Slovakia's largest banks, is anticipating little change in its loan policy.

"We are planning only a small expansion in our [volume of] loans this year," said Norbert Lazar, spokesman for VÚB. "We will only support good projects with loans," he added. However, he could not comment on what exactly constituted a 'good project'.

The banks themselves have long complained that firms are too risky to push money into. Last year alone VÚB, Investičná a rozvojová banka (IRB) and Slovenská sporiteľňa (SLSP), the three biggest banks in Slovakia, transferred a total of 62.7 billion crowns ($1.4 billion) in bad loans to state institutions as the government looked to clean up the banks before privatisation.

Ironically, though, it is this same risk factor in lending to firms which may force the banks to begin giving credit to the corporate sector again.

"Why, in the past, would banks bother lending to companies when they were a risk and the banks could get 30% returns from bonds [the top yield of state bonds in 1998 - ed.note]. But there is still a trade off between yield and risk. If the banks cannot get 10% from government bonds then they can give loans," said Chodak.

"But unfortunately there aren't that many [domestic] firms that can give banks reliable and reasonable business plans. Companies can't get cheap money and banks can't get reliable companies to lend to."

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