A survey among banks confirms a sharp contraction in credit demand

The results of this year's survey among banks confirm the findings of a relatively strong contraction in the demand of companies for bank loans, the Bank of Slovenia announced on Tuesday. Last year, demand fell by around 27 percent, and in the first half of this year by nearly 15 percent.

 

The Bank of Slovenia conducts a survey once a year to determine how the credit activity of banks is affected by factors on the side of companies' demand for loans and the basic reasons for partial rejection of loan demand by banks.

 

The volume of demand for loans decreased by almost five billion euros last year

 

Last year, despite a slight improvement in the situation at the beginning of the year, the total volume of demand for loans decreased by almost five billion euros to 13.3 billion euros, which represents a 27.2�crease. This followed an 11.3�cline in demand in 2010. Last year, demand did not fall only at three banks and two savings banks.

 

Banks approved 9.5 billion euros in new loans last year, and 4.4 billion euros in the first six months of this year.

 

The negative trend continues this year as well

 

The negative trend in loan demand continues in the first half of this year, when the volume of demand reached 6.3 billion euros, or 14.7 percent less than in the same period last year.

 

The contraction is a reflection of the decline in economic growth and the process of reducing corporate indebtedness. According to the Bank of Slovenia, the demand for loans for investments, which recorded the largest year-on-year contraction, is a particularly unfavorable trend. Last year, the demand for investment loans fell by 28 percent.

 

On the other hand, there is a growing demand for restructuring loans and extending repayment terms. The volume of loans for this purpose increased by 14.6 percent last year.

 

Based on these data, the Bank of Slovenia notes that the financing of companies with debt and equity sources continues to be unbalanced to the detriment of equity financing. However, according to the banking supervisor, this problem cannot be solved only by resolving and cleaning up the banks' bad debts, and therefore it cannot be expected that this will automatically strengthen loan growth.

 

The share of unapproved loans is around 30 percent

 

The level of excess demand for loans, or the share of unapproved loans, increased slightly in the first half of this year and amounts to 30.6 percent, but it has been hovering around 30 percent since 2010. Last year, the volume of excess demand amounted to 3.7 billion euros, in and 1.9 billion euros in the first half of this year.

 

Judging by the results of the survey, majority foreign-owned banks have adapted relatively better to the changed demand for loans, which, thanks to better operations, have reduced the level of excess demand, even though it remains significantly higher than banks with majority domestic ownership.

 

In the first half of this year, for example, domestic ownership in large banks was 23.5 percent, while last year it was 19.6 percent. In smaller domestically owned banks, it was 15% in the first half of the year, and 15.4% last year. In banks with majority foreign ownership, it was 45.3% in the first six months of this year, and 48.8% last year. Foreign-owned banks thus represent more than 50 percent of excess demand.

 

According to the Bank of Slovenia, the analysis of the survey results highlights two processes. On the one hand, this is a shift in demand for loans from banks with majority domestic ownership to banks with majority foreign ownership, which, however, reject most applicants due to poor creditworthiness.

 

On the other hand, it is a process of rejection of loan conditions by the economy, which is the result of non-competitive loan interest rate offers, which on average exceed the interest rates of banks in the euro area.

 

Banks should be more flexible

 

The Council of the Bank of Slovenia assesses that banks are reacting to the tightening of economic conditions with established reasons for refusing loans. The agony of companies without perspective and the possibility of successful business restructuring must be ended as soon as possible with effective legal procedures for the benefit of all, they say.

 

According to them, banks should focus on the other two groups. The first includes companies that have financial problems and a lower credit rating during a period of declining economic activity. Among them, banks, in cooperation with other stakeholders and among themselves, should intensively determine which ones are market-prospective and formulate a loan reprogramme for them in a timely manner. At the same time, effective legislation must enable the transfer of property rights to new owners.

 

In the second group are companies that refuse loans offered by banks in Slovenia. According to the judgment of the Bank of Slovenia, the banks must adapt the loan conditions to each individual client and at the same time, in their business strategies, expand the range of loan conditions according to their risk assessments.