Corporate lending in Romania up 40% in 2021 against 2019; but not without risks

Toward the end of 2019, one year after the enforcement of the tax on financial assets of credit institutions, Romania's banking sector was heading nowhere in terms of lending - with the Government-backed mortgage lending as the sole driver.

In a matter of two years, however, with major support from the Liberal Government - which, among others, repealed in 2020 the tax enacted by the Social Democrats - the banking system's landscape changed radically: the flow of new corporate loans extended during 2021 was 40% above pre-crisis (2019) and the stock of corporate loans at the end of 2021 increased by over one third (+36%) compared to December 2019.

Thus, the Romanian banks extended RON 89.8 bln (EUR 18 bln) new local currency loans during 2019 (+31% YoY and +35% versus 2019), out of which RON 40.4 bln (EUR 8 bln) new corporate loans: +20% YoY and an impressive 40% up versus 2019. The stock of local denominated corporate bank loans thus rose by 26% YoY and by 36% versus December 2019, to RON 93.2 bln (EUR 18.6 bln) at the end of 2021.

But this increase, driven by the Government's Covid-19 support schemes, is not without risks- OECD warns, quoting data from the National Bank of Romania (BNR).

While private indebtedness is still low in Romania, some firms and households face a significant problem of solvency, OECD warns in the Economic Survey published on January 28. Total private debts levels – the stock of loans issued to households and non-financial corporations – stood at 47.8% of GDP in 2020, well below the OECD average.

Prudential measures adopted by the authorities, such as the introduction of the cap on the debt-service-to-income (DSTI) ratio in 2019, helped to contain debt in the private sector. Nonetheless, banks' exposure to highly indebted clients is high. For instance, 55% of loans in the non-financial corporations' sector are taken by highly indebted firms (with a debt-to-asset ratio of over 75%, according to BNR).

Some firms are also vulnerable to currency and refinancing risks, which can add to difficulties in their debt repayments: external debt accounts for 54% of the total and debts with a maturity of up to one year account for 41% of the total in the non-financial corporations' sector (BNR). This calls for monitoring financial stability risks and ensuring sufficient capital adequacy, liquidity and loss provisions. Moreover, debt restructuring should be facilitated by reforming insolvency regimes through, for instance, the introduction of out-of-court mechanisms, OECD experts conclude.

Over the longer term, policy should support financial institutions to adopt business models generating higher value-added, OECD experts also recommend. In their view, the policy can strengthen banks' capacity to assess the creditworthiness of businesses, for instance, by extending the coverage of the Central Credit Registry to include information on debt collection, in particular, loans sold to debt recovery companies.