ROMANIA

April 01, 1996

A special report by Euromoney

Research guide to banking services in eastern Europe

ROMANIAN BANKING STRUCTURE

Following the collapse of the communist regime in 1990, the state withdrew from its monopolistic position in the banking sector. From only 10 banks at the turn of the decade, Romania now has more than 25 banks that are either based on state and/or private capital, or are foreign joint ventures or subsidiaries. The sector is still dominated by the top four of the five state banks, however. The so-called "Big Four" banks account for around nine-tenths of all commercial loans. In 1993 when annual inflation reached its peak of over 300%, the central bank imposed a policy of maintaining a tight monetary policy with positive real interest rates. Even so, banks have managed to attract large deposits into the banking system in the form of savings.

Since 1993, inflation has receded, slowing to 61.7% in 1994 and 27.8% in the year to December 1995. At the same time, the falling local currency and expensive credits has helped boost export growth, which has helped push economic growth up at a much higher rate than official forecasts. GDP grew by 6.9% in 1995 from 3.4% in 1994. The 1996 draft budget forecasts inflation will fall to 20% and growth to 4.5%.

However, in order to obtain new loans from international lenders, Romania must cut its 1996 consolidated budget deficit to 2.2% of GDP from 3.6% last year.

BANKING LEGISLATION

The Romanian financial sector is now regulated by two laws enacted in 1991. Law number 33 of March 29 1991 concerns banking activity, and number 34 establishes the status of the National Bank of Romania, the central bank. Banks can be set up as companies under Law number 31/1990 and have to be licensed by the central bank. Financial institutions from the communist era were restructured and given an equity base to operate under law 31.

CENTRAL BANK CONTROLS

The central bank has the sole authority for issuing regulations concerning monetary, credit, foreign exchange and payments areas. It provides liquidity to the financial system and refinancing facilities to banks. The National Bank of Romania has full supervisory and regulatory authority over the banking system and banking intermediation.

FOREIGN EXCHANGE CONTROLS

At the end of March the central bank made a series of dramatic changes to the structure of the 20-month old interbank market, stripping foreign exchange dealer licences from all but four of the 22 banks in operation in the market. Only the Romanian Bank for Development, Bancorex, Romanian Commercial Bank, and the private Ion Tiriac Bank were allowed to keep their dealer licences. The other banks are consigned to broker status and limited to a maximum exposure of only $10,000.

Earlier the foreign exchange local dealer licences of four domestic and one international bank, ING Barings, were suspended by the National Bank of Romania. The surprise move came after the central bank issued new regulations for the domestic interbank market and asserted that the banks had failed to comply with them.

The central bank sees the move as a way of bringing discipline to the market and limiting speculation by moving to a system of market-makers which would ensure the foreign exchange market operated to clear Romania's trade. According to the central bank, these four banks make up around 80% of trade volume in 1995.

The interbank market was set up on the insistence of the IMF but was beset by problems of transparency and split pricing. However, the events of late March have raised fears the central bank is attempting to manipulate the exchange rate through administrative measures and to put pressure on private banks, though the central bank denies this.

The leu has depreciated by over 65% in the year to March 1996 and the central bank has little ammunition to intervene in the interbank market as its foreign exchange reserves have been depleted to around $334 million, two months of import cover, down by nearly half since the end of 1994. In late March the central bank announced it would build up an intervention fund to allow it to play an active role in its reformed local foreign exchange market.

The central bank believes its efforts to underpin the leu have been undermined by private sector banks consistently selling the currency at less than the official rate. To fulfil IMF loan conditions which will be reviewed in May, Romania must narrow the gap between the official and market rates of exchange to less than 5%. In early March that gap stood at more than 10%.

The official rate is the reference rate of the central bank, which itself purports to be the market average rate. At the end of March the official rate had fallen to Leu2,875/$ while the unofficial rate was around Leu3,100/$.

The "Big Four" state-owned commercial banks, which may be prone to political pressure, dominate the foreign exchange market and while in the past they may have been dealing at prices lower than they officially quoted, they are now under pressure to adhere to the new regulations. Private banks are keen to see whether the central bank will be as firm with state banks as with private players. The central bank itself has asserted it does not discriminate between state and private banks or between Romanian and foreign banks. Foreign exchange licences were held by several international banks including Société Générale and ABN Amro.

According to the central bank, banks relegated to broker status will have the chance to reapply for dealer licences at some future date after the foreign exchange market reaches a "decent level of activity". Whether the draconian moves will affect Romania's planned $500 billion international borrowing programme remains to be seen, however.

CAPITAL AND LIQUIDITY RATIOS

Banks have to distribute 20% of their annual gross profits into reserves until their reserve fund is equivalent to their capital. After that, a maximum of 10% can be distributed to reserves until the reserve fund is double the bank's capital. Then, additional funds put into the reserve fund has to be made from net profits if desired by the bank's directors. The minimum share capital of a banking company can be no less than Leu25 billion.

Cover for non-performing loans can go into separate risk funds out of gross profits. According to article 27 of Law number 33, this is up to a limit of 0.5% of total outstanding credits or of the outstanding net amount of available but unused credits under the prescribed ceilings of other available resources. A bank cannot lend more than 20% of its capital and reserves to any single debtor and any credits over a specified sum have to be reported to the central bank.

All banks have to maintain minimum reserves with the central bank. One area in which the banks and the central bank have come into dispute is the provision that they have to keep 10% leu reserves on hard currency deposits. This measure is proving particularly expensive for banks with high proportions of foreign deposits.

DEPOSIT-TAKING AND CUSTODY

Licenced banks can take sight and term deposits in cash or in the form of securities. Deposits may be interest-bearing. According to articles 21 and 22 of banking law 33, banks can buy, sell, keep in custody and manage monetary assets, and may effect transfers, clearing operations and other gyro operations for themselves or third parties. Banks can also receive securities as collateral or in custody.

PRIVATIZATIONS

In a paper prepared by the government the five state-owned banks were analysed for their readiness to be privatized. The Romanian Bank for Development (BRD) has already been selected for privatization under a World Bank agreement. In December 1994 the BRD's capital adequacy ratio was 21.1%, considerably above the Basle Committee recommendations. In terms of provisions needed against its loan portfolio the BRD requires Leu98.3 billion, or 15.9% of its portfolio.

Romania's dominant agricultural bank, Banca Agricola (BA), is already in the process of being sold off. Private investors hold 18.4% of its capital and 24.6% is held by private ownership funds, while the remaining 57% is still in state hands (held by the State Ownership Fund). BA has a widespread branch network (around 300 branches), a loan portfolio of around $2 billion and the largest number of customers.

BA's auditors, according to the government report, have calculated it needs provisions against its loan portfolio of Leu669 billion (approximately 6% of its portfolio). BA's capital adequacy ratio is calculated to be 8.3%, above the Basle Committee's recommended 8% level (although it was only 4.4% at the end of 1992). BA has the largest market share of any Romanian bank, but it does have the drawback that it is dependent on central bank refinancing and its assets have been expanding very rapidly.

Bank Post is a smaller bank with a high market share in retail services and a capital adequacy ratio of 9.6% at the end of 1994. It does suffer from the fact it has a relatively large number of overdue credits and high interbank exposure, and according to the government does not yet have the appropriate commitment for privatization. Bancorex, meanwhile has broader international connections in trade financing and an expanding network, though its capital adequacy ratio was only 7.3% at the end of 1994 and it finances most of the country's imports.

Romanian Commercial Bank was seen by the government as the least likely to be privatized in the near future as it has considerable number of non-performing loans and is undergoing a restructuring programme that will cause its financial position to deteriorate further.

The author acknowledges the assistance of Brigid Lowe at Sinclair Roche & Temperley with the legal background for this article.