Peter Slavov, Executive Director of ProCredit Bank: Companies need working capital at a time of recovery from the crisis.

Bulgarian banks should be more aggressive in accumulating reserves against deteriorating portfolios.

Ludmila Kuyumdzhieva

- Mr. Slavov, Central Bank statistics reported a declining trend in the interest rates on deposits but some of the interest rates on loans are increasing. What is the reason for this discrepancy in the fluctuation of interest rates?

- Before and during the crisis, interest rates on deposits and loans were increasing but this growth was caused by different reasons. Interest rates on loans went up because banks took account of the rising risk in lending to businesses in the country and this was absolutely normal. I have commented many times that pricing in the financial sector is based on two main factors. These are the price at which we are buying money and the risk which we are calculating. It is normal for banks to calculate a higher credit risk and for interest rates to go up when the country enters a recession and a crisis is forthcoming.

With respect to deposits, the so-called deposit war among banks was the main reason why interest rates rose before and during the crisis. This mad race between banking institutions, offering more and more attractive deals on deposits, was driven by the desire to establish a reliable customer base and to maintain stable, broad-based liquidity. However, interest rates were rather high in nominal terms, not in actual terms. Now, thank God, there is no deposit war. It is over.

- Specialists from the Bulgarian Industrial Association predict that inter-company indebtedness and companies’ bankruptcies will create preconditions for problems in the banking system. What is your opinion on this issue?

- Generally speaking, this is correct because inter-company indebtedness is really high, which is slowing down the economy. When a country starts to recover from the crisis and companies’ orders go up, businesses will need money in order to take on the increasing numbers of orders and so on. Banks will have to provide them with working capital then.

- What are your expectations for the recovery from the crisis?

- I would prefer to answer this question in late September or in October because the economic activity which we have witnessed in recent months has been of seasonal nature. I wish that I were wrong and I hope that we are entering a recovery period but we must not hurry with our conclusions because it is also possible that we will be disappointed in October and November with respect to the positive signs which we witnessed in the last few months. I hope that I am wrong but, occasionally, I want to revert to the time when there will be stable signs of economic recovery and companies will start to experience an even greater need for working capital. Banks and the financial sector must be prepared to respond adequately to these needs then because if they are late the recovery effect might be impeded.

- According to some studies, the banking sector will lose over BGN 3 bn due to bad loans. Do banks have sufficient resources to cope with this problem?

- The only remedy against bad loans are provisions, reserves or capital. Thank God, banks have at their disposal fair amounts of capital accumulated in previous years when profits were big and non-performing loans were few. Due to the policy of the Bulgarian Central Bank, which motivated financial institutions to set aside their profits, currently the system is well capitalised. It is very important, however, what will happen from now on since bad loans will not stop growing when the crisis is over. I have often outlined to my ProCredit Bank colleagues the crisis curve and that of bad loans. Besides, I explained to them that these do not go hand in hand. That is, the peak of non-performing loans will be at the time when the Bulgarian economy begins to recover. This is because the companies which recover from crisis will not be the ones that are unable to repay their loans. I hope very much that, like banks recorded big profits over the years and set them aside, now they will be even more aggressive in provisioning against deteriorating portfolios. Incidentally, this portfolio, no matter how large it seems to you, when there are big capital reserves, there is nothing wrong in it and nothing scary.

- At the beginning of the crisis, many bankers commented that the worrying percentage of non-performing loans of the banking system is around 20%. However, currently, their share is about 16%.

- There is no such definite figure. Both 5% or 50% could be scary. Everything depends on the reserves that banks have. The percentage you heard about was based on stress tests. These are conducted by taking the level of available reserves and the estimated level of bad loans. Afterwards, experts assess how long banks can operate with this final amount at the given moment. In fact, it does not mean that banks will collapse after this crucial percentage has been reached. The point is that financial institutions should start granting loans not via mortgage lending but they must launch working capital financing.