HNB governor: Indebtedness and lack of collateral limiting growth in loans

Croatian National Bank Governor (HNB) Boris Vujcic has underscored that money for loans in Croatia is available more than ever as interest rates are at a historical low, but what prevents a growth in loans are a high level of indebtedness of companies and lack of collateral for small and medium enterprises.

We are in second place in central and eastern Europe with regard to the indebtedness of companies which is at a level of 100% of Gross Domestic Product (GDP), Vujcic told reporters on Tuesday during a break at the conference, "Loans and Economic Growth" organised by the Croatian Banking Association (HUB) and Croatian Employers' Association (HUP).

"In order to facilitate a growth in loans it is necessary to address that issue. The lack of capital can be addressed through higher participation of private equity funds in companies while the lack of collateral can be compensated through guarantee schemes that would guarantee part of the losses that occur with loans for small and medium enterprises," Vujcic said and added that the rate of bankruptcies for those loans was around 30 percent.

He also added that it is difficult to redeem collateral.  "That means that not only is it difficult to come by but it is also difficult to sell. These are the barriers to a faster growth in loans," he claimed.

The central bank governor noted that analyses show that economic recovery of the growth of GDP is followed by growing loans.

"In the boom we experienced until 2008, we also had a boom in loans that pulls the GDP upward but usually in an unsustainable direction as we have seen. Indebtedness grows that much that we have a crisis. During the recovery phase, first GDP grows and that is followed by recovery, that is an increase in loans," he said.

Governor Vujcic claimed that Croatia is currently recording a period of no growth in loans. "Increased loans in the corporate sector is positive but very mild," he said.

The situation on the labour market is the most important aspect of credit ratings for citizens. "The absolutely dominant factor for this is employment or rather, unemployment trends. In the case of a high rate of unemployment and low employment, citizens' loan eligibility is lower. As long as citizens are worried about the situation on the labour market, that is, whether they will have a job tomorrow, they will not be prepared to take out loans. In the case that that situation changes, then their willingness to take loans changes too," Vujcic explained. He reiterated that structural reforms were vital for economic growth. "Structural reforms are needed for the potential growth rate to get back to 3% or more to improve the Croatian economy's competitiveness," he said.

Atlantic Grupa owner and management chair Emil Tedeschi said that the problem was not that loans were not accessible. "The problem is the unqualified structure of management and poor structure in enterprises in Croatia. We lack teams, we lack quality projects, we lack courage," he said.

We need to start from education, from the responsibility of the elite which is satisfied with current results and does not sufficiently look ahead, which in principle means stagnation, Tedeschi said.

HUB president Zdenko Adrovic said that "unfortunately, there was still a high level of indebtedness of the economic sector in Croatia and steps need to be taken to ease that indebtedness in some way and that is by adding alternative ways of financing, that is quasi capital from the Croatian Bank for Reconstruction and Development (HBOR) or mezzanine financing of subordinated debts. That in combination with new capital and equity and well structured loans could be a good response to the current crisis," he said.

Asked how long a gap between economic growth and growth in loans could last, Adrovic assessed that this should not be more than 6 months.

Reflecting on the conversion of loans pegged to the Swiss franc, Adrovic said that that process has been completed. "That is currently a matter of legal relations between bank owners and the Croatian government," he said.

Last update: Tue, 05/04/2016 - 15:04

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