Today, the National Bank of the Republic of Macedonia Council held its sixteenth session, at which the Report on the risks in the banking system of the Republic of Macedonia in the third quarter of 2015 was discussed.
Today, the National Bank of the Republic of Macedonia Council held its sixteenth session, at which the Report on the risks in the banking system of the Republic of Macedonia in the third quarter of 2015 was discussed.
Due to slower growth of deposits, the banks' assets grew slowly. In addition, characteristic of the third quarter is the increase in the deposit potential which is entirely due to the growth in household deposits, while corporate deposits declined. With assets of commercial banks a movement in the same direction was recorded: lending support to households grew, while corporate loans declined minimally. The growth in deposits was due mostly to sight deposits and foreign currency deposits.
At the end of the third quarter, the share of non-performing to total loans amounted to 11.7% and thus remained within the normal level for the last two years, between 11% and 12%. Due to continued growth of loans for consumption and eased lending conditions, signals for potential risks of households were observed. Nevertheless, the challenge of banks' own funds from the possible performance of the credit risk, i.e. from the fulfillment of the assumption of default of non-performing loans was offset by the high coverage of loans with allocated impairment.
In the third quarter of 2015, the faster growth in loans compared to deposits caused a minimal reduction in the liquid assets on a level of the banking system, but they are still at a satisfactory level, i.e. provide satisfactory coverage of short-term liabilities to banks and deposits of households. The importance of other risks in the range of risks commercial banks are exposed to in the Republic of Macedonia is not high.
The solvency of the banking system is high. In the third quarter of 2015, the capital adequacy ratio remained twice the legally prescribed minimum and equaled 16.1%. Profitability of the banking system continues to strengthen, whereby the profit realized in the first ten months of 2015 is significantly higher than the profit realized in the same period of 2013 and 2014. Growth in net interest income and the growth of other regular incomes is the reason for the increased profit.
At today's meeting, the Council adopted the Decision amending the Decision on the methodology for determining the capital adequacy, introducing measures to slow the high growth of long-term consumer loans. In the last two years, quite rapid growth is registered in consumer loans, primarily consumer loans with maturity of over ten years, whose annual growth rate in September 2015 amounted to 47.5%. In practice, almost always, after rapid growth in lending, usually in conjunction with eased lending conditions, a period of difficult collection of claims follows. So far, the portfolio of consumer loans of Macedonian banks do not show performance of the risks of rapid growth and eased lending conditions. The growth of non-performing consumer loans is moderate, but in the last months it accelerates. However, under the influence of the accelerated credit growth, the share of non-performing consumer loans to total consumer loans is at a relatively low level (5.2%). The measures are introduced in order to limit the potential risks of the accelerated growth of long-term consumer loans, i.e. to influence preventively on signals for potential future growing risks of these loans, and not only for the quality of banks' loan portfolio, but also for the level of indebtedness of the population, because the indebtedness of the existing borrowers, rather than new borrowers, grows. The measure increases capital requirement for banks on long-term consumer loans with a term equal to or longer than eight years. In order not to cause major shocks in the market of consumer lending, yet the growth rates to be reduced to a moderate level, this measure is aimed only at newly approved long-term consumer loans, i.e. approved loans after 1.1.2016 with a term equal to or longer than eight years, whereby prolongations and restructurings are covered. This measure does not mean that banks will stop giving consumer loans with longer terms, but it is realistic to expect that banks will follow the signal of the National Bank and will contribute to slowing the rapid growth of these loans.
Furthermore, to prevent the possibility of diverting borrowing to credit cards and overdraft bank accounts (which have quite stable and moderate growth) due to the measure in terms of long-term consumer loans, higher capital requirement for the growth of overdraft bank accounts and credit cards realized in relation to December 31, 2015 is introduced. In this case, the measure does not apply to the existing amount of approved and used overdrafts on bank accounts and credit cards, but affects their possible further increase.
Also, with this Decision, conditions for facilitating access to legal entities are created, primarily to small and medium enterprises to financial services. Namely, capital requirement for guarantees issued by banks is reduced, which guarantees payment based on a certain business relationship of the client and claims of banks which are secured by commercial property that meets certain conditions. With this, in addition to complying with the European Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms, allowing banks to segregate a lower amount of capital for loan guarantee operations with legal entities, including small and medium enterprises, which in turn can affect towards reducing the cost of banks and thus the clients for this type of operation.
The Council adopted the Decision on amending the Decision on credit risk management, according to which, as of June 30, 2016, banks will perform write-offs of all claims which are fully booked for more than two years, in which the bank determined and fully covered the credit risk of non-collection at least two years before. According to existing regulations, banks are obliged to fully reserve requirements where the client failed to pay at least 1 up to 5 years if there is a specific security, and with the new measure, after two years when fully booked, is required to write them off. In addition, banks will continue to have the opportunity and obligation to take actions for collection of these claims, although they are written off. It is particularly important that this measure does not cause additional costs for banks because claims which are fully booked are written off, at least two years ago.
Due to the positive effects on the lending activity of the banks and the overall domestic economy, the Council decided to extend the application of non-standard measure to reduce the reserve requirement base in denars of commercial banks for the amount of newly approved loans to net exporters and domestic producers of electricity for additional two years. Consequently, banks are expected to continue active lending support to these companies through a wide range of new loan products and more favorable interest rates for further growth in the contribution of this lending in the expansion of loans to the corporate sector as a whole.
At today's meeting, the Council, discussed and adopted the Foreign reserves management and investment Policy of the Republic of Macedonia. The Policy contains guidelines for the basic currency structure of foreign reserves and the possibility of tolerances due to risk diversification and maximization of return. Also, all instruments and transactions in the management and investment process of foreign reserves are developed. Furthermore, the Policy determines the division of responsibilities in the National Bank in the area of foreign reserves management, whereby the Council is responsible for setting objectives for the management and investment of foreign reserves, the determination of the structure by portfolios, currency structure and scope of the funds, as well as setting the acceptable level of credit and market risks.
At the session the Council also adopted the Plan of Activities of the National Bank of the Republic of Macedonia for 2016, which contains a detailed review of activities planned for the next year. Regarding the regulations pertaining to the operations of the National Bank of the Republic of Macedonia for the next year, the Council discussed and adopted the Plan of Activities of the Internal Audit Department for 2016 and the Medium-term Plan of Activities of the Internal Audit Department for the period 2016 - 2018. At today's session, the National Bank of the Republic of Macedonia Council reviewed and adopted the Financial Plan, the Investment Plan and the Public Procurement Plan for 2016.
The Council also discussed other matters within its jurisdiction.