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Non-performing loans: Bad debts still rising in southeastern Europe, six years on

EBRD suggests bad-banks solution; Could help recapitalize weakest lenders

The European Bank for Reconstruction and Development is pushing for action – possibly including new bad banks – to tackle rising bad-debt levels, which it says threaten the economic recovery in southeastern Europe.

"The fact that non-performing loans are still increasing six years after the start of the global financial crisis is a major policy challenge and one that we have yet to see addressed," Piroska Nagy, country strategy and policy director at the EBRD, tells Euromoney.

Average non-performing loans rose to 17% in southeastern Europeat end-October, up nearly two percentage points since the start of the year, according to data from the EBRD.

 Piroska Nagy, country strategy and policy director at the EBRD
 Piroska Nagy, country strategy and policy director at the EBRD

The problem is particularly acute in the region’s largest economies. In Romania and Serbia, bad debts make up close to 22% of total loan portfolios, while in Croatia the figure is around 15% overall and more than 27.4% for the corporate sector. This in turn is weighing heavily on credit demand. In contrast with central Europe, where lending resumed across the region in 2013, loan books have been shrinking in southeastern Europe since the spring.

Nagy says that the reluctance of policymakers to tackle the issue has partly been prompted by fears that provisioning levels might prove insufficient, highlighting the need for further capital-raising in a challenging market.

She adds, however, that debt restructuring is urgently required, even in countries with stabilizing NPL rates and high provisioning levels. "Dealing with bad-debt portfolios is currently taking a high percentage of bank management time that could be more efficiently used in other areas," she says.

The EBRD is calling for a bargain between local regulators and the foreign lenders – such as UniCredit, Erste Group, Société Générale and Intesa Sanpaolo – that dominate banking in the Balkans to deal with the issue.

Possible answers include creating workout units at bank level, isolating impaired loan portfolios or even – as in Slovenia – implementing a bad-bank solution, says Nagy. The EBRD is also pressing regional authorities to remove regulatory barriers to restructuring and has indicated that it could help with the recapitalization of weaker lenders.

"The important thing is simply to start addressing the issue," says Nagy, "because without a solution credit growth in SEE will remain largely constrained."