Due to Credit Restrictions, the Collection of Receivables Becomes a Problem

Interest rates on loans that are realized abroad remain there; if necessary, new labor is employed there to conduct business with Croatia, local banks retain profit, and their state receives corporate tax.

Interviewed by: Lidija Kiseljak
[email protected]
Photo: Dražen Lapić

The Croatian Banking Association, led by director Zoran Bohaček, has recently been increasingly adept at representing the interests of its members, 18 banks. Bohaček was initially quite rigid in his presentations, but has recently become a true lobbyist for domestic banks, protecting them from HNB’s impositions. The most common complaints from HUB relate to measures from the Central Bank, which continue to tighten and, according to banks’ calculations, slow down economic growth, and when it comes to the latest expanded measures, they even question their constitutionality. We spoke with Bohaček about the potential jeopardy in further lending, especially to small and medium-sized enterprises, and whether the measures will also affect interest rate increases for the population.

• HUB has not been satisfied with HNB’s measures from the beginning. Do you think they are even necessary, or can they slow down the growth of external debt?
– We have not supported any measures from the beginning. When the initial measures were adopted back in 2003, we pointed out that any administrative bans cannot slow down the growth of external debt. Banks respond to demand for loans, and any intervention through non-market mechanisms, such as these measures, is not possible because there will always be a way to satisfy demand. Our growth of loans of about 20 percent would not be a great danger. A recent number of HUB’s analyses even shows that this growth is lower than what can be expected from a country with a similar level of credit market development.

• HNB must do something to slow down the growth of external debt. Do you think the measures have not helped and slowed down the economy?
– For example, the measure on the marginal mandatory reserve has been changed several times, which speaks volumes about its ineffectiveness. In May 2006, the governor stated that ‘coordinated use of monetary and fiscal policy measures is urgently needed. The growth of debt can only be curbed by drastic tightening of monetary policy measures, but this could have undesirable effects on economic growth, especially on small and medium-sized enterprises.’ After HNB adopted the measure to limit loan growth to 12 percent at the end of last year, the announcements are already visible in the market, especially after further tightening with a growth of only half a percent per month.

• The state constantly boasts about reducing debt, but most analysts still warn about its excessive spending. Do you share that opinion?
– We will consider the structure of state spending in one of our upcoming HUB analyses. But it does not matter where the state borrows, in the domestic or foreign market, or whether it finances itself through bonds or banks, which will again have to borrow abroad, or through companies. If the state reduced spending, it would limit demand in other sectors.

• The biggest blow to banks, as they claim, is this year’s measure to limit growth to 12 percent, or initially one percent and then half a percent per month. But it is evident that it strengthens a trend that has already begun, the growth of corporate borrowing.
– Yes. Large companies, if they cannot get a loan, directly borrow abroad, and small and medium-sized enterprises, which do not have that option, suffer the most. Ultimately, due to the inability to lend, the indirect effect of these measures is the consequences for payment capacity, which is reflected in the extension of receivable payment deadlines. This is the biggest problem for small and medium-sized enterprises. Additionally, small banks are particularly affected because very few of them can take on new clients due to the measures.

• But rarely will any individual be denied a loan…
– That is because individuals are still the safest clients for banks, as repayment is the best, even higher than the average in Europe. However, individuals are starting to feel the restrictions when it comes to housing loans. Under strict restrictions, banks find it more profitable to give more cash loans with higher interest than one housing loan with lower interest.

• Additionally, the measure of half a percent growth has been affected by its extension to all related companies with the bank.
– This measure is unsustainable because it assumes that the bank should be responsible if a related company places its excess money as a loan, which should enter the bank’s base. This cannot be implemented because the bank has no right to ask the company how it manages its money and to whom it has given a loan. And even if it asked, the company has no obligation to respond. Even if the bank is the majority owner of the company, it has no right to command that money not be placed because that would violate the law. This raises questions of entrepreneurial freedoms and ownership rights, i.e., shareholders’ rights.

• Related companies also include factoring companies, but not all, which banks consider unfair.
– It is known that the market operates with Prvi faktor owned by Nova Ljubljanska Bank, which was not allowed to enter the Croatian banking market, which is now proving to be a certain advantage. Because Prvi faktor has an owner outside the country, HNB’s measure on the registration of treasury bills cannot be applied to it. This creates an imbalance in the market. Furthermore, the measure also applies to, for example, Crediflex of Splitska Bank. But if the owners decide to sell it to a foreign bank that does not have a subsidiary in Croatia, that bank could freely place money through it, achieving nothing again. Therefore, we hope that the measure will be ‘reformulated’ to be, above all, in accordance with existing regulations.

• The measures have caused another phenomenon, that money is placed by companies or insurance companies instead of banks.
– This is happening and is not prohibited, and HNB cannot influence it. Banks, however, are finding it more difficult to perform their fundamental task – financial intermediation, for which they were established. Thus, it happens that all interest on loans that are realized abroad remains there; if necessary, new labor is employed there to conduct business with Croatia, local banks retain profit, and their state receives corporate tax. We are not actually fertilizing foreign savings, but it is being fertilized abroad.

• The adoption of measures for banks is beginning to resemble ping-pong. As soon as they do not meet HNB’s expectations, the measures are tightened. And so it has been several times.
– HNB adopts measures without extensive justification. For example, this month the president of the European Central Bank argued for several pages why he did not raise the reference interest rate. So, he did nothing, but nevertheless offered arguments from several aspects. If the Central Bank had announced in advance or initiated a discussion on a certain measure or, on several pages, explained its effects, i.e., what bad it brings and what good, why it is being adopted, etc., we would be able to understand it more easily. This raises the question of what troubles HNB the most – inflation, external debt, credit growth, credit or other risks.

• Probably external debt.
– But then it should be indicated and said that excessive consumption is due to, for example, too many approved car loans. This needs to be clearly stated and decided how to stop it because now measures are being adopted without justification.

• It is also interesting that HNB adopts measures a few days before the start of implementation, thus actually catching banks unprepared.
– That is, in fact, the goal. But that is not the main problem, but the aforementioned justification, because otherwise, the bank cannot make annual plans either.

• However, regardless of that, the governor has stated several times that the measures were adopted due to non-compliance with the agreement with HNB on limiting the growth of placements.
– As far as I know, there was neither an agreement nor negotiations. It is important how the term agreement is defined. If someone says that they believe placements should be limited because otherwise, they will introduce measures, that cannot really be called an agreement. An agreement would be if we could sit at the table and see if there is any possibility. But I would immediately emphasize that in a market economy, any kind of agreement is prohibited.

• If the measures harm loans for entrepreneurs, economic growth is also slowed down. Should they then be selective?
– A growth of half a percent limits investment growth. Therefore, loans that invest in production or encourage exports can be excluded from the measures, as well as housing loans for individuals.

• Is it possible to separate that, considering that it has been said several times at HNB that it cannot be done?
– Nothing is impossible. If HNB adopts measures that are impossible in themselves, it can also adopt those that would control where loans are directed. Because the Central Bank has all the data about banks and therefore has the possibility of such monitoring.

• Should there be a selection among banks, or use different formulas for limiting growth for small and large banks, as small ones are more endangered?
– It is true that small banks are more affected because their growth is hindered. A large bank has some room for growth and attracting new clients with a half percent limit on its assets. Small ones, however, can only service existing clients, sometimes at the cost of registering penal treasury bills, but very few can take on new clients. However, selection could not be made because then some medium or larger bank could rebel since any discrimination is unacceptable.

• But why do you consider it good when it comes to the selection of loans?
– Selectivity is just the lesser evil; we are against any restrictions. Non-selective monetary measures affect those that should not be affected, and as we have shown in our analyses, they can significantly negatively impact GDP.

• Some smaller banks are in HUB. Do you advocate for them with the Central Bank because they are more affected by the measures?
– Our members include both large and small banks. Therefore, if small banks want to talk specifically with the Central Bank, we are here to support them in those efforts, but also all other banks, to ensure their equal position in Croatia.

• With the tightening of measures, banks have constantly threatened to raise interest rates on loans. Some have already done so. Is this a result of the measures?
– The goal of the measures is to increase interest rates because that is the only way to reduce demand. On the other hand, reference interest rates in the European market are rising, which has affected the increase in the cost of financing sources, and therefore the increase in interest rates, but it is difficult to say how much the increase in interest rates in Europe has influenced this and how much the measures. However, the fact is that the profitability of banks has decreased, and some of them keep interest rates on loans at the same levels at the expense of their profit. However, at the same time, interest rates on savings are rising because deposits are their best sources of financing and least affected by restrictions, thus encouraging savings.

• HUB also advocates for better regulation of HNB and Hanfa.
– The goal is to reduce administrative costs, which would lead to GDP growth. All EU countries need to do this. We have submitted a request to the Parliament to obligate independent regulatory bodies HNB and Hanfa to present the effects of regulatory changes. Analyses do not need to be public, but they should present the results to the Parliament after six months. Then it would be seen, for example, whether and which measures were adopted thoughtlessly or perhaps have undesirable collateral consequences.

• You have warned that bank premiums for insured savings are also too high.
– There are different formulas in Europe according to which these premiums are calculated, and it is interesting that neighboring countries do not have such insurance for savings that is paid in advance as we do. Our law was adopted at the end of the nineties when the situation was different and when it was necessary to protect savers. But today the risks are lower, and the premiums are too high, two to three times compared to Union countries. And besides being a large premium, it is still paid, without knowing how it is managed. If that burden did not exist, it would open up the possibility of increasing passive interest rates to 0.4 percent.

• Do you consider a different system of investor protection necessary?
– Yes, because investor protection will now also be introduced. Some countries have one agency that could operate within the Central Bank or Hanfa or DAB and which would take care of insured savings, i.e., investments.

• So are you aiming for the abolition of DAB?
– DAB has played its role. It would be more logical for the insurers of savings and investments, i.e., banks and brokerage houses, to participate in managing such a fund. This fund would have a certain upper limit, after which further payments would no longer be necessary. Namely, banks have long paid the limit provided by law, so the question arises as to what DAB does with that money. We are not necessarily for its abolition, but a solution should be found on how to best manage the money intended for the insurance of deposits.