Arrears on loans in exotic currencies skyrocketed in the past year

Analysts say that the reasons for this huge rise include the strategies of lenders, who attracted their clients with promotional offers, then raised the interest rate due to the crisis affecting the banking system, but also because debtors were subject to currency risk.

“Arrears on loans in other currencies have risen, because this is a new loan portfolio with a low starting base. Banks offered introductory interest rates, initially low, and later, because of the economic situation, raising these,” Lucian Anghel, Chief Economist of Banca Comerciala Romana (BCR), said.

Arrears exceeding 30 days on retail loans amounted to almost RON 2 billion (€476 million) in July, up 8.7 percent month-on-month, and 180 percent more than in July 2008. Arrears on lei-denominated loans soared 123 percent in the July 2008-July 2009 period, to RON 1.3 bln (€310 mln), while arrears on euro-denominated loans rose by more than five times annually, to RON 619 mln (€147 mln).

“There are two types of risks that individuals with loans in exotic currencies are subject to: the foreign currency risk, which is a normal risk, and the interest rate fluctuation risk. Arrears increased because debtors cannot economically be in a good position in the long-run, meaning they cannot benefit from a low rate throughout the loan,” said Adrian Mitroi, Secretary General of the Chartered Financial Analyst (CFA) Romania Association.

According to BNR data, the annual growth rate of non-governmental credit was five percent in the first half of 2009, nearly six times lower than the level registered at the end of last year, of 25.7 percent.

“Inhibitors acted on both supply and demand. In terms of supply, they were represented by more caution on the part of lenders, which translated into maintaining tight standards and lending terms, maintaining the coefficients of provisioning foreign currency loans, and raising the volume of state bonds owned by creditors,” the BNR report states.

According to the central bank, loan demand was affected in the first six months by the worsening of the economic context and expectations related to the future evolution of revenues, but also by higher costs for new loans.