BNB reports an increase in the loans at risk of non-performance

The volume of loans at risk of default increased in the first quarter, according to the periodical issue “Banks in Bulgaria”, prepared by the BNB. The growth is due to the exacerbation of risks in the economic environment, including possible indirect effects of the war in Ukraine, the publication says. 

The Bulgarian banking system has insignificant direct exposures to counterparties from Russia and Ukraine, but there is a risk of indirect effects related to the pressure from increasing prices of energy carriers and raw materials, aslo in supply chains difficulties and deterioration of economic attitudes.

According to BNB the sharp increase in the energy carriers and row material, and troubles in supply, can bring to rise in the non-performing loans (NPL) and impairments. Rise in the interest rates by the central banks may affect the financial condition of the borrowers, increasing their costs of servicing loans, noted BNB. 

So far, low interest rates and a large supply of credits are leading to an expansion of lending to households in the first quarter as well, the report said. In the real economy sector – non-financial enterprises – the growth is also higher in the first quarter compared to the same period in 2021 (see the chart).

Continued credit growth increases the indebtedness and would worsen the effects of unfavoriable economic environment or sharp rise of interest rates, fears BNB. This can affect the ability of serving obligations on time. The Central bank noted that they already take measures to build capital buffers. 

According to international standards, loans are divided into three stages – in the first stage they are regularly paid, in the second – those with a small overdue or at risk of non-performance, and in the third stage are loans, declared as non-performing –  more than 90 days of delay payment. Non-performing bank loans have been declining for several quarters, with coverage remaining high, according to bank reports. At the end of March, the coverage of gross non-performing loans and advances with their inherent impairment rose to 49.1% from 47.9% three months earlier.

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