Every Fourth Loan to Companies is Potentially Non-Collectible

Investments have hit the ceiling, loans are being spent…’, are the lyrics of Johnny Štulić that describe the unhealthy economic (and political) situation in Yugoslavia. Loans became the reason for the crisis in the 1980s, leading to well-known power cuts and queues for gasoline, coffee, and detergent, so in the collective memory in this region, every stronger cycle of lending raises the question of whether a new credit collapse is following, similar to the one that last occurred in Croatia at the beginning of the last decade. Current data shows that lending is not slowing down, especially for citizens.

Statistics from the Croatian National Bank (HNB) show that at the end of February, total loans amounted to 43.1 billion euros, or 1.6 billion euros more than a year earlier. Of this, loans to households increased by more than ten percent, to 22.1 billion euros; loans to companies, valued at 14.4 billion euros, grew at a much more modest rate of 2.6 percent. What has long attracted analysts’ attention is the unstoppable growth of cash loans to citizens. In February, their share in total household loans reached 37 percent, the highest since May 2022. On an annual basis, by November of last year, the growth of cash non-purpose loans exceeded the growth of housing loans.

Reasons for Alarm?

Analysts at Raiffeisen Bank explain this strengthening of cash loans as a ‘reflection of probably stronger inclination towards the purchase of durable consumer goods due to the rise in nominal (and real) wages and, on the other hand, the growing need for financial borrowing.’ In other words, financial exhaustion caused by inflation. While the economy is growing, increased lending is expected. But does this threaten Croatian banks with another specter of bad loans in the event of a new crisis? Is there reason for alarm?

A recent meeting of the HNB Council showed that the first cracks are already visible. The statement from the meeting noted that,’contrary to the long-term trend of declining non-performing loans (NPL), the share of loans characterized by a significant increase in credit risk, although not yet in default status, continued to fluctuate and rose to 15.6 percent.’ In the explanation we received from the HNB, it states that these are loans where the credit risk has significantly increased since initial recognition, but the value has not yet been impaired.

– This category arises from the International Financial Reporting Standard 9 (IFRS 9), and in professional terminology, it is called Stage 2 – says the central bank.

Since this is an accounting category, the criteria are not strictly prescribed, but rather general requirements are given for entities preparing financial statements.

– One of the criteria for recognizing a significant increase in credit risk is a delay in the payment of due obligations longer than thirty days. IFRS 9 states this threshold as a presumption that credit risk has significantly increased, but this presumption can be rebutted by the entity if it can prove otherwise based on available information in a specific case – they assert at the HNB.

According to their data, the average share of Stage 2 loans for corporate loans at the end of last year was 24.6 percent. For household loans, this share was 15.5 percent, with 13.3 percent for housing loans and 17.6 percent for cash non-purpose loans, emphasizes the banking market regulator.

How likely is the deterioration of the credit portfolio in the current economic circumstances? Read more in the printed edition of Lider.