Local lenders face excess liquidity conundrum

With the central bank having lowered minimum reserve requirements for lenders, freeing up around EUR 1.4 billion of fresh funding in the market, and continuing to reduce the key interest rate, economists predict more easing this year, which will result in lower borrowing costs.

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The National Bank of Romania (NBR) decided in early January to cut lenders’ minimum reserve requirements ratio of RON-denominated liabilities from 15 to 12 percent. Reserves for foreign currency-denominated liabilities have fallen from 20 to 18 percent.

Supporting sustainable lending and bringing the reserves in line with European Central Bank standards were cited as the main reasons for this decision.

The reserve reduction started last week, and central bank governor Mugur Isarescu added that around RON 4 billion and EUR 500 million would be released as a result of this move. This would add to the overall banking liquidity of around RON 6 to 8 billion.

“Those banks that did not have an excess of liquidity will go less on the monetary market, will continue the lending process, maybe in an accelerated rhythm. RON lending is improving. The fact that overall lending is falling is exclusively due to foreign currency lending,” said Isarescu this month.

The central bank has also continued to cut the key interest rate to a fresh low of 3.75 percent, continuing a trend that started in July 2013.

Monetary easing set to continue in 2014

Eugen Sinca, chief analyst at BCR, reckons the NBR will further cut the key interest rate to 3.5 percent in the first trimester of this year, while the minimum reserve requirements in RON could go below 10 percent.

“With inflation staying in the 1 to 1.5 percent band in the first semester of 2014, the weak growth in RON-based lending justifies the additional easing of the monetary policy, both by reducing the interest and by lowering the mandatory reserves and introducing additional liquidity in the market,” Sinca told BR.

Sinca says that the monetary easing that started in the second half of last year has paid off as interest rates on new RON-based loans fell by around 2 percent in this period. He added that something similar could happen this year, when RON-based loans should support to a larger extent private companies’ investments and household consumption.

Florentina Cozmanca, senior economist at RBS, predicts a reduction of the key interest rate to 3.5 percent at the next NBR meeting scheduled for February 4, adding that the minimum reserve requirements are set to fall further as well.

“The cut in the monetary policy rate, as well as the reduction of the minimum reserve requirements ratios, will be rapidly reflected in the reduction of interest rates in the banking sector,” Cozmanca told BR.

The favorable evolution of inflation, coupled with the persistent deficit of aggregate demand and interest rates on the inter-banking market, could trigger a reduction of the key interest rate by 50 basis points, in two steps by year end, reckons Claudiu Cercel, deputy general manager of BRD Groupe Societe Generale.

Some commentators have argued that the lower key interest rate will further deter households and companies from saving, although the governor says banks have done a good job in securing long-term deposits.

“If the reference rates and lending rates are decreasing, saving rates will do so too. But, it may have an effect on the deposit volumes in banks, because in Romania customers still haven’t accepted that very low rates exist, like the ones in the Euro zone. If the previous years’ excellent deposit growth stops, it may harm lending as well,” Laszlo Diosi, CEO of OTP Bank Romania, told BR.

Additional liquidity funneled towards debt payment

The lower reserve requirement has given lenders some breathing space, and some will pay their debts, according to Isarescu.

The BCR analyst says that some of the fresh euro liquidity may be used by banks to reimburse short-term external financial lines, which would reduce Romania’s dependency on external flows of capital.

“The liquidity in RON could easily be absorbed within large infrastructure projects, such as motorways built in public private partnerships or equipping the agricultural sector with modern equipment if we see an enhancement of farmland consolidation in 2014,” says Sinca.

Diosi of OTP adds that the majority of the funds will stay in the country, although some lenders will continue to make due payments to parent banks or to external markets.

As the three-month Robor index (the average interest rate for RON loans on the inter-bank market) has fallen below 2 percent, lending in RON is set to pick up, according to Cercel of BRD.

He says interest rates of between 3.5 and 5.5 percent in RON for SMEs consolidate both their borrowing capacities and their financial stability perspectives by eliminating the risk component in the exchange rate.

“Never in the last 20 years have we had more favorable conditions for lending to companies in the local currency: economic growth, abundant liquidity and interest rates in the local currency comparable to or more favorable than those in foreign currencies,” Cercel told BR.

RON 6 billion – RON 8 billion – bank liquidity on the market

RON 4 billion and EUR 500 million – fresh funding released after the central bank reduced minimum reserve requirements for banks

3-month ROBOR
January 22 2014 – 1.98 percent
January 22 2013 – 5.88 percent

6-month ROBOR
January 22 2014 – 2.65 percent
January 22 2013 – 6.09 percent

Ovidiu Posirca

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