Bulgarian banks have tightened their conditions for granting loans due to increasing risk

Banks in Bulgaria have tightened their credit conditions both to households and enterprises, while at the same time slightly loosening requirements for some of the consumer loans. These conclusions are noted in the latest issue of the periodic “Economic review”, published by the Bulgarian national bank (BNB). According to the survey, conducted by the Central bank, in the first quarter of the year credit conditions are tightening both for corporate and mortgage loans, compared to the last quarter of 2021. In consumer loans, granted by the banks, terms are slightly loosening, noted BNB. 

Banks reported the strongest tightening of credit conditions for enterpises in terms of the premium for riskier loans. As regards household loans, banks tightened their conditions for fees and commissions accrued and collateral requirements.  

For example – conditions for a maximum amount of monthly income, which remains after paying the installments on all the customer’s loans. Another requirement for collateral in mortgage lending is the restriction of banks to grant funds that cover at most 70-80% of the property’s market value, in some cases even less. In previous years, with some banks, customers with a good credit history could receive up to 90% of the property’s value. With housing prices on the rise, in practice there have been cases of financing reaching close to 100% of the purchase price.

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According to BNB analysis, the main influence for tightening of credit policy – standards and conditions, was the increased risk assessment and bank’s lower risk appetite. The decreased borrower solvency assessment, the overall macroeconomic environment along with the business climate in industrial sectors with a high share in credit portfolio and the higher collateral risk were essential for the risk assessment. 

Concurrently, high liquidity and competition in the banking sector, as well as significant volumes and low costs of attracted funds continued to exert a strong pressure for easing bank credit policies. Deposits in Bulgarian banks continue to grow but growth rates have slowed in recent quarters (see the charter). However, the banks have a significant resource, until recently with zero or at least attracted with low interest, which means the availability of more funds to give out as loans.

The necessity of financial resources for working capital and accumulation of inventories was considered by banks to be the main factor behind stronger demand for corporate loans over the quarter. Factors behind the increased demand for consumer loans included low interest rates, demand for financial resources for purchasing durable goods and goods intended for current consumption and the desire of certain households to finance their consumer expenditure by loans secured by real estate. In addition to low interest rates, households’ needs for funds for purchasing a first home and especially additional residence, for refinancing, restructuring or renegotiating debts and housing market prospects contributed essentially to the higher demand for housing loans over the quarter, noted BNB. Although many economists and even the Central bank express fears of property prices falling, the purchase of property is still perceived as a promising investment in Bulgaria.

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