External borrowing more expensive

Published: 7/12/2005

At its meeting today, chaired by the Governor Dr Željko Rohatinski, the Council of the Croatian National Bank reviewed the economic and monetary developments in the past three months and the quarterly report on the state of the banking system as well as adopted measures aimed at restricting external borrowing and thus related increase in banks' domestic placements.
These measures are caused by indicators that reflect external borrowing growth accelerating over the past few months. According to the said data, in the past month alone external debt grew by some 430 million euros, totalling 24.6 billion euros at the end of November, which is some 11.3 percent more than a year earlier. As a result of greater reliance on domestic sources of finance, enabled by central bank's open market operations, the government's external borrowing decreased by 6.1 percent, while direct corporate external borrowing grew at a rate of 18.8 percent and banks' external debt by 24.9 percent. External borrowing enabled banks to increase their domestic placements (October this year compared with the same time a year ago) by 21.1 percent: loans to the government went up by 38.8 percent, while loans to other sectors went up by 17.9 percent, with loans to households going up by 23 percent.
Such borrowing dynamics encourages imports and widens current account deficit, creates appreciation pressure on the exchange rate and increases debtors' vulnerability to potential interest and exchange rate changes. The CNB Council therefore deemed it necessary to take measures aimed at discouraging new external borrowing and further growth of bank placements at such high rates.
Pursuant to the amendments to the Decision on Marginal Reserve Requirements banks will be required to allocate 55 percent, instead of the 40 percent required thus far, of their foreign liabilities' increase to a foreign exchange account held with the central bank. In addition to foreign liabilities of banks and related persons, the calculation base also includes guarantees issued by banks for direct external borrowing of their clients as well as assets received by a leasing company with no special relationship to a bank. This Decision shall be applied as from the date of marginal reserve requirement calculation on 11 January 2006.
It is expected that with the increased marginal reserve requirement banks will have no economic interest in additional borrowing abroad. Nevertheless, they will still have ample liquidity, since the general reserve requirement rate was at the same time reduced from 18 to 17 percent. As a result of this change, which too will be applied as from the calculation date in January, banks will have 2.1 billion kuna at their disposal (of which two thirds in kuna and the remaining share in foreign exchange). The general reserve requirement rate is planned to be further reduced to 16 percent in the coming year. In this way, banks will be given room for total placements growth of over 10 percent, which will be sufficient to support economic growth and normal market demand.
In addition to harmonisation with International Accounting Standards, changes and amendments to the central bank's Decision on the Capital Adequacy of Banks and Decision on Classification of Placements and Contingent Liabilities of Banks obligate banks to pay more attention to currency induced credit risk. This, among other things, includes increasing the risk weight of foreign exchange loans and loans indexed to foreign currency, which are extended to debtors whose foreign exchange assets cover less than 80 percent of their foreign exchange liabilities, by 25 percentage points.