Romania Central Bank Tightens Foreign Exchange Lending Rules

The Romanian central bank tightened its rules on lending in foreign currencies as it seeks to boost leu-denominated credits and stem growth in bad loans.

The new rules, which took effect Oct. 31, limit the maximum maturity of consumer credits taken in foreign currencies to five years, down from 20 years and increase the down payment for mortgages to 15 percent for leu-denominated credits, 25 percent for euro-denominated credits and 40 percent for loans taken in other currencies, the bank said in a document on its website.

“The rules aim to set a balance between leu-denominated credits and those in other currencies and will help consolidate financial stability in the country,” the central bank said in an e-mailed statement. “They also aim to assure proactively a client’s ability to repay their loans.”

Eastern European countries, including Hungary and Romania, witnessed a boom in foreign-currency denominated loans over the last decade as clients tried to escape high interest rates in their local currencies. They are now experiencing repayment problems after their currencies depreciated.

The Romanian leu fell 18 percent against the euro since the collapse of Lehman Brothers Holdings Inc. three years ago, while the Hungarian forint declined 18 percent against the euro and plummeted 63 percent against the Swiss franc in the period.

All Banks

All the banks in Romania, including branches of foreign banks, will be obliged to abide by the lending rules. State- backed mortgages denominated in foreign currencies won’t be affected, the central bank said.

Lenders must determine the degree of a client’s indebtedness based on a worst-case scenario where the leu would weaken 35.5 percent against the euro, 52.6 percent against the Swiss franc and 40.9 against the dollar, interest rates would rise 0.6 percentage points and the client’s net income would fall 6 percent.

“The new rules should have a limited impact on banks’ profits in the short- and medium-term because there is practically no demand for new credits,” Andrei Radulescu an analyst at Avangarde Finance said by phone today. “I don’t think we will see a rebound in loan demand anytime soon because economic growth is slowing and we could even fall into a recession in the first quarter of next year.”

Romania’s banking industry is dominated by Austrian lenders, which control about 39 percent of the market, followed by Greek banks with 15.5 percent and French lenders with more than 10 percent, according to central bank data. Erste Group Bank AG (EBS)’s Banca Comerciala Romana SA is the country’s largest lender by assets, followed by BRD-Groupe Societe Generale (BRD) SA.

The industry posted a combined loss of 516 million lei last year, with 22 of the 42 banks operating in the country failing to post a profit, central bank data show. Bad loans accounted for 13.6 percent of total lending at the end of August, central bank Deputy Governor Cristian Popa said on Oct. 5.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net