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Sep 10, 2007 14:10 EEST
Septemebr 10 (SeeNews) - Restrictive measures introduced by the Bulgarian central bank will lead to a slight increase in interest rates but are unlikely to cool bank lending, analysts and industry officials said.
As of September 1 the Bulgarian National Bank (BNB) raised its mandatory reserves requirement for local commercial banks to 12% from 8.0% of deposits seeking to reduce the credit risk in the banking system accumulated with the fast lending growth.
"This is a belated measure and will not be last because it will not produce the short-term effect expected by BNB," Viktor Mechkarov, executive director of Central Cooperative Bank, told SeeNews.
Increased household expenditure and keen investment appetite of Bulgarian business looking to raise its competitiveness after the country joined the EU led to breakneck lending growth since the beginning of the year, when the BNB dropped its previous restrictions.
Corporate lending rose by 55% in the year to end-July while the volume of loans extended to households grew 42% on the year.
According to Mechkarov BNB's move was aimed at curbing the rise of the current account deficit, expected to swell to 18% of the gross domestic product this year.
"The most important reason [for the restrictions] is this -- the limiting of the deficit."
Bulgaria operates under a restrictive monetary mechanism called currency board which bans the central bank from lending to the government and ties cash in circulation to the level of the central bank's foreign exchange reserves. Under the currency board the Bulgarian lev is pegged at a fixed exchange rate to the euro.
Bank lending finances the growing domestic demand which results in a rise of the current account deficit, Mechkarov said.
Nikolay Tanev, analyst with the Bulgarian unit of Hungarian policy research and consulting firm Political Capital, agreed.
"The effect of these measures will be felt after six to nine months," Tanev said.
He added that seasonal factors like winter promotions onf mortgage and consumer loans are likely to sustain the credit growth.
"The restrictions will not have a significant impact on the offers and promotions for new clients," Tihomir Toshev, executive director of credit advisory firm CreditCenter, said.
"We do not expect the measures to lead to a lower number of promotions by banks or an increase of interest rates for new clients, as a large part of the banks have resources which they want to lend and the market continues to be very competitive," he added.
Bulgaria has 25 locally-registered banks in addition to four branches of foreign banks.
Mechkarov said he does not expect central bank's measures to lead to a significant rise in interest rates, unless global interest rates continue rising.
According to Toshev, some banks will probably raise the interest rates on loans already issued.
"The increase in EURIBOR and LIBOR and the key interest rate of BNB is a good excuse for this," Toshev said.
Bulgarian banks' loan portfolio rose by some 24% last year, slower than the 33% growth in 2005. The BNB scrapped all administrative restrictions on lending from January 1, when Bulgaria joined the European Union. The central bank has said it would aim to keep the annual growth rate of lending below 20%.
INTEREST RATE WAR
Three of the largest Bulgarian banks have already announced increases in their interest rates due to the raised minimum reserve requirement.
UniCredit Bulbank, the largest by assets in the country, has said it will lift interest rates by between 0.25 and 0.5 percentage points on its credit products.
United Bulgarian Bank, third largest by assets in Bulgaria, raised by 0.5 points its interest rate on mortgage loans and First Investment Bank, the fifth largest Bulgarian lender, also said it will increase interest rates.
According to Matthew Mateev, executive director of First Investment Bank, the measures of the central bank are timely and will help limit the credit expansion.
Some of the local banks were criticized for loosening the lending standards while fighting for bigger market shares.
"I hope long-term lending at the current negative interest rates will be limited and even stopped," Mateev said.
He added that some banks having foreign parents will probably keep on aiming for bigger market shares and will continue to follow an aggressive lending approach.
Mechkarov does not believe that BNB's move will stop the interest rate war. Asked whether he expects the central bank to introduce stricter measures he answered:
"If the banking system stops this crazy competition and things begin to develop more smoothly, this should not happen. But I don't believe this. The war for market shares is more important now, than the stability."
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