Lending to corporations and households in Hungary continued to deteriorate in the fourth quarter of the year, survey results released by the Magyar Nemzeti Bank on February 26 showed. However, offering a brighter note, credit to SMEs grew 3.6%.

The ongoing drop in bank lending will be a disappointment to the government and central bank, both of which have been working hard – wielding both carrot and stick - to revive credit to an economy that is showing signs of slowing growth. The banks have remained wary, having been battered by policymaking since Fidesz took power in 2010. Lending has dropped to around 50% of GDP in recent years, compared with levels of over 70% pre-2008 crisis.

The overall corporate lending portfolio of Hungary's banks dropped 6.7%, or by HUF50bn, in October-December, according to the MNB's quarterly ‘Trends in Lending’ survey. The household lending portfolio contracted 15.1% in annual terms, a drop of HUF111bn.

It's a sensitive issue for the central bank, which has been forced to step in with cheap credit to the banks to pass on to borrowers in recent years. In the survey, the MNB is keen to point out that "corporate lending growth was also influenced by one-off items and the base effect. After adjusting for these, the corporate loan portfolio's rate of decline is lower, at 2%."

The annual drop in corporate lending accelerated to 12% in December from 5.3% in November. Total stock sat at HUF5.95tn at the end of 2015. Overall loans to households fell 12.5% y/y to HUF5.89tn (€18.9bn) in December.

Particularly disappointing for the authorities is that corporate lending is still to gain any traction in the year or so since Budapest signed a peace deal with the banking sector. However, as the increase in SME lending suggests, the situation does appear to be changing slowly.

The key, suggest bankers, is that the vulnerability of the economy to external shocks – which was amongst the highest in Europe in 2010 – has now been vastly reduced. The pain inflicted on the banks helped Budapest reduce the deficit and state debt. That has lenders now growing in confidence that the government means it when it says it will cut them some slack.

"We are a bank, we want to make money, so are very keen to start lending again," the head of research at one of Hungary's biggest banks tells bne IntelliNews. However, lenders claim there is simply little demand for credit.

In a move the analyst calls a "political necessity," until recently the MNB and government has been rejecting that claim, insisting that the banks should work to start lending again. However, that view appears to be abating, with both the banks and the MNB appearing to agree that relations are on the mend again.

"The banks are in a much better position now, they're cleaned up and ready to lend," Marton Nagy, vice governor at the MNB, tells bne IntelliNews. "However, the large corporates are all cash rich right and can fund investment."

On the other hand, there is a "big push in demand from SMEs" he notes with evident satisfaction. "The MNB is much happier now with the state of bank lending and with SMEs leading the way," he claims.

"The banks participating in the survey reported an increase in credit demand for long-term loans," the notes accompanying the survey point outs. That "may be followed by a pick-up in demand for short-term loans as well."

The survey predicts that is set to continue, albeit with the central bank's Funding for Growth scheme still playing a leading role for the meantime. The document notes "[s]ignificant growth potential in SME lending in 2016 in line with the MNB’s expectations".