The stock of overdue bank loans in Romania contracted by 35% y/y to RON13.4bn (€3.0bn) at the end of January according to data reported by the central bank. Overdue loans increased marginally from €2.9bn at the end of December, but they account for only 6.1% of the total stock of loans compared to 9.5% one year earlier.

Payment discipline has improved markedly over the past three years and the overdue loans to total loans ratio contracted from its peak of above 15% in early 2014. The improvement in fact reflected the sale of large bundles of bad loans. Separately, the low interest rates in previous quarters pushed down the cost of the debt, making it more supportable to debtors. The reversal of the money market interest rates, to which the lending interest rates are indexed, is expected to result in higher interest paid by debtors, hence putting pressure on credit quality.

Of the total overdue loans, 55.7% are denominated in foreign currency (and account for 7.8% of total forex denominated loans) and the remaining 44.3% are local currency denominated loans (accounting for 4.7% of the local currency loans). Better payment discipline for local currency loans reflects the inflow of new local currency denominated loans that tend to be of a higher quality (at least in the first years of service).

Lower interest rates have helped the credit quality, but the rise in money market interest rates is expected to put pressure on debtors in the coming quarters. Separately, sales of non-performing loan (NPL) bundles are expected to continue leaving banks’ portfolios with a larger share of healthy loans.

The NPL issue has been tackled effectively over the past two years when the EBA-defined NPL ratio dropped from 20.7% at the end of 2014 to 9.5% at the end of 2016. There is still a significant stock of NPLs, some of them now out off the banks’ balance sheets, that have not been settled yet and are on the market to be purchased by debt recovery agencies.