bne -

Hot on the heels of a new state investment fund, Poland unveiled another plank in its plan to revive the flagging economy on October 15, as financial regulator KNF outlined a scheme designed to boost borrowing by easing the terms and conditions on consumer and mortgage loans.

"At the moment consumer loans are the only lending category showing declines," KNF chief Andrzej Jakubiak told a press conference, according to the Wall Street Journal. "We think these regulations will help slow down the process, but there are other factors at play here like borrowing costs that affect demand."

The market watchdog, which has strongly policed the country's foreign-owned banks to stem capital outflows, said it could relax requirements for credit worthiness procedures in banks which sport capital adequacy ratios above 12%, and Tier 1 ratios of above 9% during the last six months.

Those restrictions on the banks that can accept the eased terms from consumer borrowers are part of a concurrent attempt by the KNF to reduce the role of the shadow banking sector. The goal is "to enable lending growth of the banking sector vis-a-vis lending institutions from outside the regulated sector," the KNF chief said.

Loan sharks

Current regulation on the consumer credit conditions have encouraged many to seek loans from unregulated financial companies. Demand has been so strong that banks opened special entities to offer loans to consumers outside the banking sector and sidestep steeper regulatory obligations concerning loan size, and necessary documentation and checks before approving loans.

However, recent disasters such as the Amber Gold scandal, which saw investors lose around PLN70m, have led to calls to clamp down on the financial sector. That, however, doesn't quite tally with Poland's need to stimulate the economy right now. Domestic demand has been the saviour for this large EU state over the last few years, helping it to become the only EU state to ward off recession in 2009, and pushing it to star status amongst investors early in 2012 as analysts forecast it would again shrug off the Eurozone crisis to record robust growth.

However, five years of crisis are now catching up, and the Polish population - beset by unemployment and low wage growth - are slowing consumer spending, sending economic growth plummeting. Poland's private consumption growth slowed to 1.5% in the second quarter, from 2.1% in the first, while banks' consumer lending has been on the decline since the end of 2010, reports the WSJ.

Facing growing unrest, Warsaw - previously pushing tough austerity - is finally reacting to the slowdown. On October 12, Prime Minister Donald Tusk unveiled a new state-backed fund designed to boost private investment into infrastructure. At the same time, the National Bank of Poland is widely expected to kick off an easing cycle in early November.

According to KNF estimates, banks controlling 90% of the sector's assets will meet capital the criteria to take advantage of new rules. The regulator wants to pass the new rules by the end of the year, with a three-month interim period so banks could start to benefit by April 2013.

Key elements of the new proposal contained in the draft recommendation include separation of regulations on cash loans from regulations on mortgage lending, elimination of stiff debt/income thresholds, simplified credit procedures for smaller sums or for clients with long-term relationships with the lending bank, creation of strictly-defined stress tests and definitions of "significantly engaged" banks in the segment for whom regulations might be tighter, a KNF letter to banks shows, according to The Warsaw Voice.

On the same day that Jakubiak outlined the plan, Moody's Investors Service released a report suggesting that lowered asset quality is a growing risk for the Polish banking sector as it slows. "The slowdown in economic growth has placed banks' performance under pressure by weakening credit demand and reducing 'bankable' lending opportunities in Poland," the report says, fretting over "banks' potential exposure to a significant asset-liability mismatch risk". The report also adds that as profitability drops in the sector, the temptation of the capital held in Polish units for parent banks in Europe such as UniCredit and Santander is only likely to grow.

However, Jakubiak's deputy, Wojciech Kwasniak, also spoke to the press on Monday, reiterating that the KNF will continue to keep a close eye on capital flows at the country's foreign-owned banks. Insisting it expects them to retain "at least" 25% of 2012 profit, the official announced the watchdog will discuss individual cases before the end of the year, reports Reuters.

"We will adopt an individualised approach, we will announce it (individual rules for banks) at the end of November or at the start of December," Kwasniak said. Foreign parent banks would have been over the moon to be able to payout 75% of 2011 profit in dividends, with the KNF managing to push most well below 50% this year.