What's happening with credit? BSH's warning and the inability of families to pay: Do we risk an economic collapse?

For a long time, the Bank of Albania has warned the second level banks to be careful in granting loans. Meanwhile, banks have recently strengthened the provision of loans. On the other hand, Albanian families are having difficulties in repaying the installments.

But what is happening in this sector? Is it turning into a bubble and could create an economic collapse? Why have banks increased the level of cash savings?

This doubt is also confirmed by the latest data where Albanian families had difficulties in repaying the loan during the first half of the year. The weight of families that have a loan to pay has not changed, while the paying ability of families has weakened compared to the last six months, but appears better than a year ago.

The results of the Bank of Albania's survey on the financial situation and debt load of families for the first half of 2024 show that about 24% of families had at least one loan to pay. This share has remained unchanged compared to the same period of the previous year, remaining below the historical average of the indicator of 27%.

About 74% of families stated that the loan payment is "less than 30% of the monthly income" and this indicator decreased by 9 percentage points in six-month terms, but remained about 5 percentage points higher than last year . The same changes in six-month and annual terms are also represented by the share of families for which the loan payment exceeds 30% of income.

Central Bank Warning

The analyzes of the Bank of Albania show that the banking sector is in a good financial situation, but also the need to take some preventive measures.

According to the latest Financial Stability report, these measures are mainly related to the need to slow down the speed of the financial cycle (of credit growth) and to increase the banks' resistance to risky exposures.

The report underlines that bank credit increased significantly during the period. In annual terms, credit expanded by 11.1%, while compared to the end of 2023, it increased by 7.1%. This performance was mainly influenced by the strong growth of loans in Lek, the growth of long-term loans and the growth of loans for businesses.

Credit to non-residents also increased during the period, but remained close to the levels of the previous year. Adjusted for the exchange rate effect, annual credit growth would be around 14%.

One of the fastest growing loan segments in recent years is the loan for the purchase of real estate. Due to the requirements of the banking sector to cover this type of loan with collateral in the form of real estate, this type of loan and collateral mutually support each other's changing values, reinforcing the exposure of the banking sector to developments in the real estate market.

Although there is a lack of solvency, the demand for loans increases, but banks are being more selective

The demand of the private sector for loans marked a significant increase in the first half of this year.

The growth has come from all three customer segments, but it has been more visible in the group of small and medium enterprises (increase of 29% compared to a six-month period ago and 37% compared to a year ago) and in the segment of individuals (respectively an increase of 6.4% compared to the previous six months and 10.4% compared to a year ago).

During the first half of 2024, banks reported that they have considered a total of 72,418 loan applications, of which 91% belong to the segment of individuals. This distribution has marked a slight shift in favor of enterprises, both compared to the previous period and compared to a year ago.

Although the demand for loans has increased significantly, it seems that in the first half of this year the banks have been more selective.

In the total number of applications considered during the period, it turns out that about 25% of them were rejected by the banks. This rate has increased by 4.3 percentage points more than the second half of 2023 and 2.7 percentage points more compared to the first half of last year.

However, the increase in bank rejections in the first half of 2024 occurred only against the "individuals" category, while this indicator resulted in a decrease for both categories of businesses, both in six-month terms and in annual terms. So banks have shown an increasing tendency to lend to businesses.

Banks increase the reserve in case of bankruptcy to 21.6%

Five out of 11 banks in our country have met the 18.2% objective of the Bank of Albania for holding a certain amount of capital and financial instruments, such as bonds, the amount which is used as a reserve to compensate the banks' losses, in case that the latter face financial crises or risk bankruptcy.

In the report on the progress of the minimum requirement for regulatory capital instruments and accepted obligations, MREL, it is emphasized that banks have exceeded this objective in the first half of the year, reaching an average of 21.6% in reserves. This means that they have set aside enough money and financial instruments to face potential crises.

In Albania, 5 banks are considered critical for financial stability, as they control about 75% of the total banking assets. As a result, only these banks are required to meet this target, because one of their financial problems could cause the entire system to collapse. / VoxNews