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Rising cash loans in Serbia: Coping with inflationary pressures

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Serbian citizens have increasingly turned to loans, particularly cash loans, as high inflation in recent years has squeezed their purchasing power.

According to a credit report released by the Association of Serbian Banks at the end of February, citizens owed banks nearly six billion euros in cash loans, while housing loans amounted to 5.6 billion euros. Over the past year, the volume of cash loans increased by 5.8 percent, with housing loans rising by five percent. However, given the soaring property prices, the number of approved loans for property purchases has actually dwindled.

The surge in inflation prompted central banks worldwide, including the National Bank of Serbia, to hike key interest rates, affecting loan interest rates accordingly. In Serbia, the cost of cash loans has skyrocketed by nearly 50 percent over the past two years. In January, the average interest rate on cash loans in dinars stood at 13.05 percent, up from around 8.6 to nine percent two years ago.

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However, with inflation easing and the National Bank halting interest rate hikes, the ascent in cash loan costs has halted, even declining from the previous peak of nearly 15 percent on average in May of the preceding year.

Interestingly, the average interest rate on cash loans indexed in euros remains low at 3.5 percent. However, the volume of newly approved cash loans in euros remains minimal.

Vladimir Vasić, former Secretary-General of the Association of Serbian Banks, attributes the rise in cash loans to citizens’ need for additional funds. He notes seasonal spikes in loan demand, such as before the school year, during holiday seasons, and ahead of summer vacations.

Regarding forecasts for interest rate declines, particularly for euro-denominated loans, Vasić suggests that it depends on the European Central Bank’s policy, with potential reductions expected in the coming months.

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As for loans in dinars, Vasić believes that any interest rate drops hinge on decisions by the National Bank of Serbia, which has refrained from raising the reference interest rate for the third consecutive time. The timing of potential rate decreases remains uncertain, contingent upon various factors including signals from the European Central Bank.

While the average interest rates on cash loans in dinars range from 13 to 17 percent among major Serbian banks, smaller institutions may offer rates of 10 percent or higher.

Overall, Serbia’s higher interest rates, coupled with its broader cost of living, underscore its comparative expense compared to neighboring countries.

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