Hungary Central Bank Offers Incentives to Boost Lending

  • Central bank aims to boost corporate lending by 5-10% in 2016
  • Incentives for lending to include lower capital adequacy ratio

Hungary’s central bank revealed new incentives to boost corporate credit after a previous funding plan failed to encourage lenders to boost loans to support small- and medium-sized companies as much as planned.

The Growth Supporting Program will reduce supervisory capital requirements next year for banks that step up lending, the National Bank of Hungary said in a statement on Tuesday. The central bank will assume part of the risk on some loans via interest rate swaps and will introduce a preferential deposit facility for qualifying banks.

The central bank, trying to ward off an economic slowdown, is trying to increase credit to smaller companies by as much as 10 percent next year. Using incentives is part of an effort by Prime Minister Viktor Orban’s government to repair frayed ties with the financial community. Banks have criticized Orban’s administration after it imposed Europe’s highest banking tax and forced lenders to bear most of the costs tied to conversions of Swiss franc loans.

“We want to help lenders transition to market lending in a way that stagnant small- and medium-enterprise lending and declining large-company credits will post growth in 2016,” central bank Vice President Marton Nagy told reporters in Budapest. “There is no penalty” for banks that don’t step up lending, they just “won’t get as many incentives,” he said.

Credit Risk

Under the new plan, the central bank will provide 1 trillion forint ($3.5 billion) next year in interest-rate swaps that will be conditional on lenders expanding loan volumes to small- and medium-size companies by 25 percent of the allocated swaps.

Qualifying banks will also be able to hold excess liquidity in a preferential deposit facility at the benchmark rate. The total amount of the deposit facility is 500 billion forint. The extent of the cuts in capital requirements for qualifying lenders will be worked out in negotiations with banks, according to the statement.

The central bank will also phase out its current Funding for Growth plan starting in 2016, cutting its volume by 40 percent compared with 2015 to 600 billion forint next year, Nagy said. The funding will be split evenly between local-currency and foreign-currency lending, with the latter coming out of the National Bank of Hungary’s foreign-currency reserves. Banks will be required to extend the credit at no more than 2.5 percent interest.

OTP Bank Nyrt., Hungary’s largest lender, was little changed at 5,503 at 3:50 p.m. in Budapest. OTP competes mostly with units of foreign banks including UniCredit SpA, Erste Bank Group AG and KBC Groep NV.

While the central bank wants Hungary’s government to tie any cuts in the bank levy from 2016 to higher corporate lending, it no longer demands that cuts be proportionate to specific lending targets, Nagy said.

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