CORRECTED - INTERVIEW - Serbia C-bank Should Cut Further Dinar Ratio on Mandatory Reserves To Boost Lending

A corrected version follows:

BELGRADE (Serbia), November 19 (SeeNews) – Serbia's central bank should cut further the dinar ratio of mandatory reserves on euro liabilities as means of boosting lending and spurring the economy, the deputy chairman of Raiffeisen Banka’s managing board Zoran Petrovic said.

He added the central bank, NBS, has made a step in the right direction by slashing five percentage points off the ratio of dinar-denominated mandatory reserve requirements on euro liabilities of local commercial banks last week.

"Having in mind the modest lending activity of banks, as well as low aggregate demand, I think that the central bank should continue cutting the ratio of mandatory reserve requirements more aggressively," Petrovic told SeeNews in an interview.

Last week, NBS kept its key repo rate unchanged at 10% and cut to 20% from 25% the ratio of mandatory reserve requirements on euro liabilities that commercial banks have to maintain in Serbian dinars, aiming to improve the dinar liquidity of the banking system.

The cut will release some 14.5 billion dinars ($227.9 million/153.4 million euro) to commercial banks, which in turn will have to allocate an additional 153.4 million euro to mandatory reserves on their liabilities in euro.

In Serbia, provisioning rules are far stricter compared to international standards and thus provisioning levels are several times higher than needed, Petrovic said.

“To some extent it is reasonable and prudent, but regulation is way too restrictive and it is something that harms the banks’ profits and costs a lot of money, so it needs to be addressed and worked upon. It is an area where we expect further liberalization."

High interest rates are an upshot of Serbia’s failure to stabilise inflation in the long run, said Petrovic.

“This is important because we need to have lower dinar interest rates in order to make the dinar more attractive to businesses and citizens to borrow in."

Between 60 and 70 percent of loans in Serbia are extended in foreign currency, making clients more vulnerable in times of crisis, said Petrovic.

“What does this mean? This means that when it comes to disruptions in foreign exchange reserves inflows, you have an immediate negative effect on the local currency, which turns into a higher credit risk."

"Despite the sharp decline in domestic and international demand we continue to have one of the highest inflation rates in the region. We are a phenomenon,” said Petrovic.

Serbia’s October consumer price index (CPI) fell to 5.2% year-on-year from 7.3% in September. On a monthly basis, the CPI declined 0.2% after edging up 0.3% in September.

NBS expects the country's CPI to fall to 7.5% this year from 8.6% in 2008. NBS expects 6.0% inflation next year with a variation band of two percentage points on either side provided government-controlled prices will grow by 11% with the same variation band.

The NBS requires commercial banks to maintain as minimum mandatory reserve 10% of their dinar liabilities. For their foreign currency liabilities, banks have to maintain 45% as mandatory reserve with the central bank, of which currently they pay 20% in dinars.  

Raiffeisen Banka posted 2.75 billion dinars in pre-tax profit through September, down from 5.69 billion a year ago. Its deposits and loans totalled 62.7 billion dinars at the end of September, slightly down from 62.77 billion dinars a year earlier.

Raiffeisen Banka, a unit of Austria's Raiffeisen Zentralbank was Serbia’s third largest bank out of 34 banks active in the Balkan country at the end of September with total assets of 183.67 billion dinars.

The NBS last changed its repo rate on November 5, lowering it to 10% from 11%.

(1 euro=94.5367 Serbian dinars)