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Euro area banks are tightening business lending conditions while credit demand is shrinking

Euro area banks slightly tightened business lending conditions in the first quarter of the year, while demand for loans in the corporate sector shrank significantly against the backdrop of expectations to the contrary, shows a regular survey of the European Central Bank (ECB).

The survey notes a significant drop in the demand for corporate loans and credit lines, which is in contrast to the previous expectations of banks in the EU countries, the ECB notes. Central bank experts believe that the reason is the reluctance of businesses to invest in long-term assets. Shrinking consumer confidence among households is another possible factor.

Overall, the perception of higher risk in the system leaves an imprint on the lending process and makes it more difficult. Credit demand continues to decline amid high debt servicing costs and a stagnant economy. In the past years, in order to control inflation, the ECB has undertaken an unprecedented increase in the main interest rate to a historically high level of 4%. With price growth calming down, the Central bank is currently preparing the ground for its reduction.

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And while demand for enterprise loans is decreasing, lending conditions in the corporate sector are surprisingly tightening. According to central bankers, however, competition and the growing propensity of credit institutions to take on risk are putting pressure in the opposite direction and helping to ease credit standards, the ECB noted. For example, for the first time since the end of 2021, the conditions for mortgage lending are being eased, and in this segment banks are lowering their standards to some extent. In the consumer lending case it isn’t the same – the criteria remain restrictive.

The expectations for the second quarter are linked with unchanged conditions for household loans, and those for companies – to tighten even more, but “moderately”. In the coming months, banks forecast a moderate decline in demand for corporate loans and a net increase in demand for household loans in the second quarter of 2024.

According to the latest data from the Bulgaria National Bank (BNB), as of February, new granted housing loans worth BGN 746.5 million (EUR 381.68 million ). Of these BGN 164 million (EUR 83.85 million) were refinancing of existing loans, and the new ones are total BGN 582.5 million (EUR 297.83 million ), or 71% year-on-year growth, which is nearly twice as fast a growth rate compared to January (38.2%), when banks in the country granted new mortgage loans for BGN 430 million (EUR 219.86 million). The average interest rate on newly granted mortgage loans in BGN decreased to 2.54% in February compared to 2.57% in January. The dynamics in this segment is the reason some economists warn of overheating and a bubble in the real estate market. Consumer loans are also increasing, while corporate lending is performing much more modestly.

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