Romania needs a strategy to enhance both fi nancial intermediation and fi nancial inclusion. With a level of economic welfare which makes us rank penultimate in the European Union and last as regards fi nancial intermediation and fi nancial inclusion, Romania has to take steps to reduce these gaps which have been deepening in time. Just like fi nancial literacy, digitalization or fi nancial inclusion, fi nancial intermediation is one of the coordinates for which the banking sector, the entire fi nancial, political and institutional environments should partner up, with a view to really better the Romanians’ lives. Collaboration bridges need to be established for the general interest of the public at large, instead of some artifi cial fracture points, with negative eff ects for society and for the fi nancial ecosystem of Romania.
The level of fi nancial development and intermediation is strongly associated with the real growth of GDP/ capita, with the physical capital accumulation rate and with improving the effi ciency with which economies make use of capital. This conclusion belongs to a survey on enhancing fi nancial intermediation in Romania, drawn up by PricewaterhouseCoopers for the Romanian Association of Banks, survey which starts with the analysis of 80 countries for a period of 30 years, countries in which surveys have shown that fi nancial intermediation creates the prerequisites needed for future economic growth.
Romania has made huge progress since its joining the European Union in 2007. In the 12 years elapsed under the EU umbrella, the nominal Gross Domestic Product advanced by 160%, to about €200 billion.
In Romania, GDP/capita expressed in the purchasing power standard (PPS) reached 64% of the EU average in 2018, compared to 44% in 2007, according to Eurostat. In Romania, GDP/capita amounted to €9,600 in 2017. With a speed that provides for sustainable fi – nancing, Romania can migrate toward the group of EU countries where GDP/capita tends to reach €20,000 (the Czech Republic €18,100; Estonia €18,000; Portugal €18,900; Slovenia €20,800). The Romanian banking sector’s assets grew by 80% in the last 12 years. The doubling of the Romanian banking sector’s assets happened in a context in which the European banking industry has taken a long and not-too-easy road – sometimes even a bumpy road – particularly during the crisis.
The Romanian banking sector is sound and has proven to be immune to the crisis viruses. With capitalization standing at 20% and the quick ratio standing at 37%, the main pillar of the fi nancial industry of Romania provides more than 75% of the fi nancing of Romania’s economy. But, in order to assure a smooth convergence, Romania has a long road to take. Both nominal and real convergences are needed for the adoption of the single currency – the euro. For that to happen, we should fare at a speed that would allow us to obtain a convergence advantage, namely our speed should be higher than the speed of the group we have been chasing. In Romania, fi nancial intermediation (calculated as the weight of assets against the GDP) reached 51.7%. Financial intermediation is half compared to Bulgaria (99%), Hungary (93.53%) or Poland (90%).As weight of non-government credit against the GDP, fi nancial intermediation is 26.6%, so that Romania is under the EU average of 83%, and under the averages of the countries having emerging economies (Poland and the Czech Republic – 52%, Bulgaria 51%). The banking sector has the capacity to support sustainable lending but we need a set of measures which must be implemented in a time horizon of 4 years at most. This decision lies in the authorities’ hands. Committing to a pro-active policy of boosting lending and the number of the people who use banking products and services leads, in time, to more economic welfare for the Romanians.
As such, it could be a success story for politicians as well. They need a will agreement so that some politicians turn from being passive to being pro-active. What measures do we propose? The survey mentioned above proposes fi ve key measures to enhance fi nancial intermediation, namely: maintaining a stable legal framework; facilitating a better interaction between banks and customers via automation and digital technologies; enhancing fi nancial literacy; a public Programme to support fi nancial intermediation via guarantees and co-fi nancing; and stimulating investments.
In Romania, the legal framework relevant for banking has undergone numerous transformations, some necessary in order to harmonize the Romanian legislation with that of European countries, with others creating volatility. In the last 5 years, the unpredictability of the banking legal framework accelerated via the recurrent increase in the number of laws and regulations adopted (about 50 new laws during 2014-2018). Five of them were considered fully/partially unconstitutional by the Constitutional Court.
The positive side of this – we need to see also the good part of this situation – is precisely that, contemplating the high pressure on the industry, the public’s understanding and support for this industry have both gone up. But, the unpredictable legal framework, the low level of fi nancial literacy and a low level of economic welfare are the drivers that could slow down an adequate manner of doubling GDP/capital at national level.
The solution could be concluding a “gentlemen’s agreement” as regards assuring legal predictability in the next 10 years. This agreement should provide for periodic consultation with the fi nancial industry, assessing the risk of the legal initiatives proposed via impact studies and assuring an open dialogue among the Government, entrepreneurs and banking institutions, via workshops and discussion panels, in order to assess the potential impact of legal changes.
For the companies which do not have enough collateral or which do not have the risk appetite of commercial banks, we should facilitate access to funding via guarantees and co-fi nancing. The SMEs with a precarious economic standing (negative capital, falling profitability and liquidity) should concern the authorities.
Enhancing fi nancial literacy has been a desideratum of the banking industry. A solution for better fi nancial integration is monitoring and fostering a European programme to enhance fi nancial literacy. Thus, the cornerstone of this harmonization should be the introduction in the school curricula as mandatory fi nancial education for all European Union citizens. At national level, the authorities have taken, together with RAB, the fi rst steps in drawing up a National Strategy for Financial Literacy. This is a long road that Romania needs to undertake, including as regards tactics’ implementation. Romania can and must enhance the level of fi nancial literacy, and the involvement of the relevant “ambassadors” can lead to more importance given to this topic.
The fourth measure allowing for a better interaction between banks and customers via automation and digital technologies has the role of giving momentum to economic growth and to labour productivity, while contributing to less fi scal evasion. The enhancement of adopting digital technologies will make the Romanian economy become more attractive for investors and will contribute to the shrinking of the “underground economy”, consolidating the eff orts of Romanian authorities in this fi eld. In addition, digitalization is an unprecedented opportunity to enhance the fi nancial autonomy of millions of vulnerable people. Implemented with care, digitalization could bring about huge benefi ts for the entire community and for vulnerable groups particularly.
The measures proposed would bring about benefi ts for the Romania’s population and economy, on medium and long term. The Romanian authorities and politicians must turn into a priority the promotion – via legal measures and not only legal for that matter – of the tactics which could give momentum to lending, to bank intermediation and to fi nancial literacy.
Lending – strategic pillar for the development of Romania’s economy
Lending gives momentum to investing in any economy. The macroeconomic framework – including here the policies adopted – has impact upon lending. An economic environment perceived as very risky infl uences negatively fi nancial intermediation, while the adopting of certain policies that boost economic growth has a positive eff ect.
The challenges associated to lending include asset taxation measures starting with 2019, the legal initiatives which do not observe constitutional principles and the private sector’s capacity to access loans. In order to enhance the fi nancial intermediation level, banks need capital, liquidity, legal predictability and bankable customers.
Although the impact of introducing a tax on fi nancial assets seems to be only on banking institutions, the fi nal cost will be paid by society in general, due to the shrinking of lending with a strong negative impact upon consumption, output and investments and, implicitly, upon the state budget, in the future. There is high risk that this tax on banks’ fi nancial assets produces negative chain eff ects across the economy, with a direct impact pertaining to the shrinking of economic growth or even entering recession. And the solution is to give up this tax.
The Romanian Association of Banks has been deeply worried about the negative impact which could ripple upon credit institutions and upon the process of lending to the national economy, if the Law to amend Law no. 77/2016 on datio in solutum is passed. This law establishes fundamentally wrong solutions which breach the decisions already ruled by the Constitutional Court of Romania, being susceptible to harm fi nancial stability and aff ect banks as part of the National Critical Infrastructure, lending and investors’ trust in the Romanian State.
This law promotes explicitly and directly fi nancial indiscipline among consumers and generalizes the lack of predictability on the lending market, since it encourages from the very start the consumers who either want to apply for a loan or to give up an outstanding loan to consider pro-actively that they could give up loans anytime, even if they get more indebted. And such a situation will generate more NPLs, will affect banks’ results with direct impact upon their capitalization capacity and upon lending to the Romanian economy, will reduce the population’s access to loans and will increase banks’ costs with managing recovered assets, with eff ects on the real estate market; all these issues generate a negative impact all across the economy.
The rejection by the Constitutional Court of the law set which establishes capping interest rates on loans, removing the writ of execution feature of loan contracts and putting a ceiling to the amounts which can be recovered by receivable collectors, only 2 months after its passing, confi rms the volatility of the Romanian legal system and the highest risk perceived by investors.
The act of taking some initiatives to court produces only a number of unwanted eff ects and contradicts the actions performed at European Union level related to solving the high levels of NPLs, contemplating the fact that these loans are considered as representing high risk to fi nancial stability and to economic growth.
The major diff erences when it comes to the regulatory standards adopted by Member States contribute to the fragmentation of the single market which, at its turn, aff ects the free circulation of capitals and services in the EU, leads to insuffi cient competition and slows down the development of a functional secondary market for bank loans.
We are of the opinion that is in the authorities’ interest to adopt measures leading to the mitigating of social disparities, with a view to enhance economic welfare, reduce migration and improve demographics. We appreciate that these measures are necessary in order to provide a level playing fi eld on the internal market, so that all economic players benefi t from uniform regulations and similar profi tability conditions while maintaining payment discipline.
Non-government credit advanced by 7.9% in 2018, to 251 billion lei (€54 billion), at a growth pace of the leidenominated loans of 13.4%. The loans/deposits ratio went down to 74.5%. The non-government credit structure per segment is divided as follows: 53% are household loans and 47% are corporate loans. 2018 meant changes in the structure of the loans granted to the private sector. Thus, the weight of lei-denominated loans represented 66% of total loans – the highest level post 1996.
The credit granted to non-fi nancial companies and to the population is to go up annually on average by 5.8% during 2019-2021, according to the NBR Report.
Banks’ strategies show us that in the next 3 years, corporate lending is to have the highest annual growth pace, i.e. 10.9% (with growth of almost 13% in 2019). As for SMEs, lending is to grow at an annual pace of 6.9%, while household lending is to grow at an annual pace of merely 3.4%.
As for the segment of the population, here we have the growth of new loans granted with a fi xed interest rate; 25.5% of mortgage loans and 80% of consumer loans granted during March 2018-March 2019 are fi xed-interest loans.
The statistics of the National Bank of Romania show that the mortgage loans granted via the “Prima casă” government programme kept standing at an important level, representing 31% of the new mortgage loans (3.8 billion lei – annualised data in March 2019), respectively 45 % of the mortgage loans stock (34 billion lei).
When it comes to access funding, surveys show that companies have been facing problems such as not enough eligible guarantees, the lack of know-how to structure projects viable from a fi nancial point of view, the undercapitalization of companies (in Romania, 40% of companies have what is termed as ‘negative capital’), bureaucracy, excessive procedures to be granted EU funds and a low level of fi nancial literacy.
If we analyse the economic and fi nancial performance of non-fi nancial companies, we notice that in the case of ROE, the advance was 0.5%, i.e. to 17.1%, while ROA reached 6.9% (compared to 6.5% in June 2017). The ratio between commercial credit and fi nancial credit is about 3:1, a situation which increases the risk of fi nancial blockage, namely of insolvency. Actually, the companies under insolvency proceedings are accountable for 43% of the NPL portfolio found in credit institutions’ balance sheets, NBR data show.
The NPL rate for non-fi nancial companies adjusted by 3.6% to 8.5%, in December 2018. The NPL rate for the loans granted to SMEs reached 10%. Surveys show that, in Romania, an SME culture is still not rooted, more than half of the start-ups disappearing in at most 10 years since their registration date.
In Romania, the SMEs weight is 99.7% against total companies, compared to an average of 99.8% in the EU; they cover 65.8% of total labour, compared to 66.4% the European average, according to Eurostat data.
Taking into account the crucial role that SMEs play in employment – contemplating that at national level, 2 of 3 employees work in SMEs – it is essential to provide access to viable funding that would support expansion, innovation and development projects for SMEs.
Credit institutions have the resources needed to support lending with solvency and liquidity ratios at high levels but, for an adequate expansion of corporate lending, companies must be bankable. There are a number of vulnerabilities such as the high level of indebtedness or the long period of time needed to recover receivables, a situation which burdens banks’ lending eff ort. The enhancing of corporate lending can be performed via an adequate capitalization of companies and via strengthening payment discipline.
We are open to initiate an on-going dialogue with the Romanian authorities in order to identify the most effi cient programmes for supporting lending. In this respect, RAB supports the setting up of a Working Group having as target to enhance fi nancial intermediation in Romania.