bne IntelliNews -

Hungary’s government is mulling additional tax breaks for banks that increase their lending compared to 2009 levels, Economy Minister Mihaly Varga said on June 2.

Those banks that have increased lending in the past five years could get a reduction of up to 30% in the special banking tax imposed on their assets. The tax relief will be capped, however, at HUF10bn (€32mn) in 2016, Varga added.

The planned measure comes in addition to the already agreed reduction in the headline bank tax starting next year. Both measures are part of a government push to persuade banks to resume lending in order to avoid an economic slowdown.

Last month the government submitted a bill which sets out reductions in the special tax on the sector in 2016-2018. The levy will be cut to 0.31% of assets in 2016 from the current 0.53%. The charge will be reduced to 0.21% in 2017 and kept at that level in 2018.

Budapest pledged to cut the levy in an agreement with the EBRD and Austria’s Erste Bank reached earlier this year. Ever since announcing the agreement in February, however, the government has been asserting that banks should boost lending in return for the lower tax.

Still, it could not place such a condition in the bill because it would have reneged on the agreement with the EBRD. Therefore, it is now considering the additional measure.

Years of harsh treatment since the Fidesz government took office in 2010 has led Hungarian lenders to rein back lending. Bank lending dropped from 75% of GDP in 2009 to just 53% last year. Having taken on the role of the economy's main lender in 2013, the central bank will have pumped over HUF2 trillion into cheap credit for small businesses by the end of this year. But the central bank can't keep up that pace.

Analysts at Portfolio.hu, however, estimate that the announced bank tax relief will not translate into actual relief for any large Hungarian bank. “It is the smaller ones which boosted their loans over the last five years that should be happy about it instead,” they note.

However, Varga added that banks boosting their loan stocks in the coming years could also become eligible for the allowance. While that would do little for the big banks in the immediate future, the fact that Budapest is using the carrot rather than the stick is refreshing.

While scepticism will remain given the government's track record of imposing erratic and painful policy on the sector, the fact that the state now has considerable skin in the game is seen offering some insurance by analysts. Hungary has bought into three major banks in the past few months.

Budapest is also keen to escape junk status with the major ratings agencies, having lost its sovereign investment grade with all three in 2012. The likes of Moody's and its peers have expressed scepticism that Prime Minister Viktor Orban will stick to his promises; in a bid to prove itself, the government rushed through the 2016 budget bill containing the details of the tax cut.