Citizens’ lawsuits with banks over the cost of loan processing and housing loan insurance premiums, as well as changes in long-standing and legally permitted practices that banks have the right to charge these costs, can seriously jeopardize the hard-won stability and confidence of both domestic and foreign public in the banking sector, assessed the authors of the economic bulletin “Macroeconomic Analysis and Trends” (MAT).
“If the potential effects of litigation related to loan processing fees and costs were realized, the banking sector would, even if we took the most cautious estimates, make a loss above the banking sector’s five-year net pre-tax net profit, with a possible decline in capital adequacy below regulatory minimum, ie entering the undercapitalization zone, which could lead to the bankruptcy of some banks,” it is stated in the new issue of MAT issued by the Chamber of Commerce of Serbia and the Institute of Economics in Belgrade.
It is estimated that, in the medium term, the effects of such a scenario on economic activity are extremely negative, and would bring the Serbian economy into a much worse situation than it was in the period of the greatest crisis from 2009 to 2012. Only the absence of credit growth would determine, according to some estimates, a decline in consumption and investment of about four percent of gross domestic product (GDP).
Tightening credit standards
“It is possible, if not almost certain, that in conditions of increased uncertainty and mistrust of investors, as a consequence of the subsequent change of the ‘rules of the game’, unfounded in the legislative framework of Serbia, but also in comparative practice, there will be withdrawal of foreign-owned banks from domestic markets,” warned the authors of MAT.
Their analysis states that it is certain that in the short term there would be a significant tightening of credit standards, which would reflect on the volume of lending and interest rates on loans. Banks that would continue to operate on the domestic market, due to the environment of reduced competition, but also the need to compensate for their losses, would certainly, as estimated, increase interest rates, which would reflect on worsening financing conditions for businesses and citizens.
The hypothetical absence of bank loans intended for consumption and investment loans would, it is estimated, lead to stagnation of economic activity in Serbia in the next year, instead of the expected GDP growth of four percent.
If in such a situation there would be a reduction in foreign direct investment, then a reduction or absence of profitability of the economy, reduction of government investment, employment and wages in the private (probably in the public) sector, even more realistic would be a fall in GDP, said the authors MAT.
Balance of payments and public finances disorder
They warned that the disturbance would first be seen in the balance of payments and public finances. The exit of banks from the domestic market, but also the outflow of capital on other bases (sale of dinar bonds, slowdown of net inflow of foreign direct investments) would cause pressures on the foreign exchange market, which would require the need to spend foreign exchange reserves to preserve dinar stability.
“The question is whether and to what extent the stability of the exchange rate could be preserved in such circumstances, which would overall represent a negative signal to other investors. There would be a large balance of payments deficit, sudden spending of foreign exchange reserves, depreciation and inflationary pressures,” the authors of MAT believe.
They pointed out that in public finances, the problem would first appear in the financing of the deficit and repayment of the principal, because the demand of non-residents for securities issued by the state would be largely absent. Demand would also be absent from domestic banks, which would have significantly lower credit potential in the event of losses caused by a decrease in income after the collection of loan processing costs. In that case, the state would have to issue securities at much higher interest rates and thus attract speculative capital, which in itself poses a great risk.
“Given the fact that disputes would be conducted over a longer period of time, it should be borne in mind that the negative implications would not materialize immediately, but there is a risk that uncertainty in this field lasts for a longer period of time and becomes an integral part of the domestic business environment. It would have a demotivating effect on the inflow of new, but also the retention of existing, both portfolio and foreign direct investments, and the country’s credit rating would be reduced,” the MAT author estimates, BiF reports.
