High levels of non-performing loans (NPLs), inadequate bankruptcy procedures and insufficient funding constrain credit growth in the six Western Balkan countries at times when credit is most needed, the International Monetary Fund said in its Regional Economic Outlook for Europe issued on November 13.
According to the report, credit-to-GDP ratios are still below the levels predicted by fundamentals in most of the Western Balkan countries despite growing modestly in the last few years, and the factors holding this back are unlikely to be resolved soon.
Although funding by parent banks has increased, it is not enough as foreign banks see limited prospects in the region and push their local subsidiaries to self-fund. Moreover, some of the parent banks have faced stress in the past and some of them are still vulnerable.
At the same time, local banks in the six Western Balkan countries - Albania, Bosnia & Herzegovina, Kosovo, Macedonia, Montenegro and Serbia – are successful in attracting deposits, “but it remains to be seen whether in a region of historically low savings deposits alone will sufice to propel credit penetration forward”, the IMF said in the report.
High level of NPLs is also curbing credit growth as, although declining, their share is still “at levels that are far from healthy”, the report noted.
Local banks must strengthen their balance sheets, expand funding bases and tackle nonbank structural obstacles. At the same time, the six countries need to secure a legal framework for dealing with NPLs, accelerate judicial reforms and improve bankruptcy and insolvency laws.