Romania’s non-performing loan (NPL) ratio under the European Banking Authority (EBA) definition decreased to 8.24% in July from 8.32% in June and 11.02% in July 2016, the central bank announced. 

The rate has steadily decreased from nearly 21% at the end of 2014, when the NPL ratio was calculated for the first time under this methodology; the rate must have peaked at around 23% during 2014, according to evaluations based on alternative NPL ratios metrics available.

However, credit quality data indicate that the NPL ratio might bottom out in August. Rising interest rates on the local money market generate risks of a further increase in bad loans as the volume of loans extended in recent years (mostly local currency, state-guaranteed mortgage loans) will be subject to higher interest rates. The local currency’s weakening will put pressure on the recipients of foreign currency loans as well — and in this case the pass through will be much faster (compared to the pass through of money market interest rates to the loan interest rates, indexed to the three month average of the money market).

The stock of overdue loans (defined as the loans for which instalment payments are overdue at the end of the month) returned to €2.8bn or 5.5% of total loans at the end of August from €2.7bn (5.4% of total loans) in June-July, the central bank announced. In fact, overdue loans have remained constant since the end of last year and the improvements in terms of the NPL ratio were achieved mostly on the back of generation of new loans. 

The increase in the stock of overdue loans in August was driven by the deterioration of payment discipline in the segment of foreign currency denominated loans where the stock of overdue loans increased from 7.1% of the total in July to 7.8% in August. The share of overdue loans remained at 4.1% of total loans for local currency denominated loans. But this segment is most vulnerable to the increase in interest rates seen these days on the money market, particularly as the loans were extended with government guarantees.