Bulgarian National Bank expects moderate increase in NPLs

Non-performing loans (NPLs) will increase – the  question is how much it will be and when it will start. This is shown by the latest report of Bulgarian National Bank (BNB) – “Macroeconomic forecast” as of September, which outlines several premises for a NPL growth. The paper was published at the end of October, when the measures against COVID-19 were not very restrictive in Bulgaria. Since then, the situation is getting worse and it is possible to see a new lockdown of the economy, which will intensify the impact on NPLs growth. 

The expiration of the COVID-19 related moratoria for part of the loans is one of the main reasons for NPLs increase. At the end of 2021 the last moratoria expires and the debtors should pay regularly. In the other countries the impact until now has a slightly negative effect – a small part of loans became non-performing. The BNB’s forecast is also for a “moderate” increase. At the end of September the value of loans under moratoria was BGN 9 billion. 

Private investment will recover only partially to the levels pre-2020, due to the continuing uncertainty, according to BNB. The investments will be mainly in the construction sector. Growth of demand, low interest rates and active credit supply will support the investments.  

In 2022 the increase of public sector wages will slow down and this will restrict economic activity. At the same time the inflation rate is accelerating and by the end of 2021 will reach 3.8%, according to BNB, counting by the harmonized indices of consumer price. Economic research shows that the high inflation rate in developing countries leads to an increase of NPLs. 

Growth in the lending segment will continue and BNB expects 7.3% increase in 2021, compared to 2020. The increase will be led mainly by the household loans. Growth of demand for consumer and mortgage products go along with “favorable prospects” for the housing market. Low interest rates and more flеxible customer requirements will accelerate the credit growth, said BNB. In 2022 and 2023 we will see a slowdown due to weaker increases in private consumption. 

The growth in lending, which we see now, poses risks and a few months ago BNB warned about it. The growth in NPLs will pressure lending after the credit moratoria, as well as the Central bank’s attempt to “cool” the market by increasing the so-called countercyclical capital buffer from 1 October 2022. Actually, this buffer is a type of macroprudential instrument that restricts bank lending. 

According to the latest BNB data, NPLs and advances are continuing to decline. At the end of September their share was 6.4% of all loans, compared to 6.72% at the end of June 2021.

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