Serbia, Interest in fixed interest loans is growing

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Central banks that believed in the ‘transitional’ nature of inflation started to raise reference interest rates a little later, while others reacted strongly by taking restrictive measures after the first sign of steep price growth. Today, the consensus is that the trend of inflation will continue for a long time and central banks are much more focused on containing it, so that it does not become and remain rooted as the new normal in the consciousness and behavior of both consumers and companies. In these efforts, central bankers do not seem to be paying much attention to the potential recession that can be caused by slowing economies due to high interest rates, but again the general consensus is that a short-term recession is more acceptable than high inflation rates that can last for a long time.

Of course, central banks will be expected to be careful not to raise interest rates more than necessary, but assessing the dynamics and level of raising will be a very demanding task in the current economic-geopolitical circumstances.

This is how Jasna Terzić, president of the Executive Board of Erste Bank, evaluates the actions of central banks that have been fighting rising inflation for several months by increasing their reference interest rates. In an interview with, she talks about the impact of monetary policy tightening on banking sector operations, the expected trend of inflation in the coming period, cooperation between the financial and real sectors and the continuation of the consolidation of the Serbian banking market.

– In our country, the tightening of monetary policy started on time, but at a slightly slower pace compared to other countries in the region, taking into account the nature of inflationary expectations, local market specificities and the influence of the dinar interest rate channel in the transmission mechanism of monetary policy. The National Bank of Serbia increased the reference interest rate for the first time in April, after which the monetary tightening continued month after month, so that it currently stands at four percent. The increase in the reference interest rate led to an increase in belibor rates, which resulted in an increase in the price of dinar loans for the population and the economy. In addition to the National Bank of Serbia, the European Central Bank, which is extremely important to us, has increased interest rates after 11 years, for now cumulatively by 125 basis points, in order to suppress inflationary pressures in the Eurozone.

How did the tightening of monetary policy affect citizens’ and businesses’ interest in new loans?

– Bearing in mind the current market and geopolitical trends, as well as the structure of inflationary pressures, the expectation is that the growth of market interest rates will continue in the coming period, regardless of the expected global recessionary tendencies. Although there has been no significant slowdown in the demand for new loans by the population and the economy, the effects of the previous increase in interest rates, the expected additional tightening of central banks and an environment in which inflation is at higher levels will certainly have an impact on future lending, demand and the capacity itself. clients to borrow.

When we talk about housing loans that are of most interest to citizens, on a global level, primarily in the markets of the USA and Great Britain, in the months behind us, a significant slowdown in demand has already been noticed due to the increase in interest rates and increased economic uncertainty. On the other hand, we have not noticed such a trend in our bank, but what is noticeable is that the interest in housing loans with a fixed interest rate has been growing significantly since the beginning of this year. the same annuity amount.

How much longer do you expect key interest rates to rise and when prices and markets could stabilize, that is, return inflation to an acceptable range?

– According to the expectations of our analysts, it would be said that most central banks have moved between half and two-thirds of the way in raising the main interest rates. For now, the peaks of inflation rates are not clearly visible and the additional uncertainty caused by the expectation of the highest values ​​may lead to an even more aggressive tightening. However, the current consensus is that inflation readings could indeed peak by the end of this year, but in that case a gradual decline could mark all of 2023 and even much of 2024. Then, in late 2024, there would be a return to target levels.

In the last two years, we have been going through several consecutive crises – from the corona virus pandemic to the conflict in Ukraine, which brought disruptions to the global energy and food markets. How did the financial sector fare during this period?

– Precisely because of the Covid-19 pandemic, all participants in the economy have gained diverse experiences in overcoming imposed business and living conditions and restrictions. We can say that with the help of stimulus measures, the state, economy and citizens, as well as banks, overcame the crisis. Of course, there are scars in the form of weakened financial positions and still insufficiently recovered supply channels, but there are also good sides, such as, for example, digitalization. What lies ahead of us this winter is a different challenge with an undertone of armed conflict that in itself creates insecurity for everyone. Dominant aspects of those challenges are energy, inflation and food.

It is certain that governments will again take measures to protect their economies and we are already witnessing attempts to soften the price shock, both for the economy and for the population. Unfortunately, some business entities are already hinting at a reduction or even a complete suspension of production due to the unprofitability of business with extremely high energy costs. On the other hand, households are trying to get used to the new prices while there are discussions about the “real level” and the individual perception of inflation, and they change some consumption habits or choose more favorable brands for their consumer baskets. The reality is, however, that higher prices will most likely remain present for a long time, and that the decline in inflation will be long-term and gradual. Ultimately, banks are likely to become more cautious in their lending activity and, taught by the experiences of the pandemic.

Financial literacy as a priority

Erste Bank has been engaged in financial education of citizens for several years. How important is it, especially in such challenging times, to make thoughtful decisions?

– As a financial institution, we see our responsibility, obligation and sincere desire to provide support, share knowledge and experience, give advice and empower our citizens in this area. Improving financial literacy in a holistic sense in order to foster good financial health of all members of society is our absolute priority and it is our way to enable citizens to make better informed financial decisions and take control of their financial future through financial literacy. We want to encourage them to choose solutions that will allow them to feel safe and take advantage of the opportunities presented to them. A strong society is based on educated and financially healthy individuals who believe in themselves – points out Jasna Terzić.

How prepared were the Serbian banks for these unexpected crisis situations? How much has banking changed in the new circumstances and what are the current main challenges in the Serbian banking market?

– The business environment today is faced with several intertwining challenges originating from global markets, such as the Russian-Ukrainian conflict and the related energy crisis, as well as high inflation that caused the tightening of the monetary conditions of the largest central banks through the rise of interest rates and the reduction of monetary mass. In this context, starting from April, the National Bank of Serbia increased the reference interest rate for seven consecutive months this year, and after a multi-year period of monetary policy of plenty of cheap money (where, for example, the Euribor rate had a negative value), the adjustment of the economy and banks to the changed monetary conditions is precisely the biggest change we are facing. The rise in interest rates has already led to an increase in the price of loans, but also to an increase in the profitability of savings.

The rise in world energy prices and general inflation, as well as the high probability of a recession in the euro zone, bring with them additional risks for our economy. The inflow of foreign direct investments is still at an exceptional level, the growth rate of the gross domestic product is a satisfactory 4.1 percent, but with an expected slowing trend, while the deficit of the current account of the balance of payments was the first to react to the changed circumstances and has had a negative development since the beginning of the year. Bearing the above in mind, as well as the experiences from the crisis caused by the Covid-19 virus pandemic, today we are trying to create additional reserves in our risk costs for potential negative effects in the coming years, and it should certainly be pointed out that the amounts of capital and liquidity in the banking sector are still on a high level.

Already during the first months of the pandemic, the banking sector emphasized that it was most concerned about a possible drop in economic activity and a possible re-accumulation of non-performing loans, which would slow down lending to the economy. On the other hand, many businessmen still emphasize the insufficient availability of sources of financing and recall the problem with liquidity. How do you assess the current cooperation between the financial and real sectors and in what direction could it move in the coming period?

– In such a complex environment, with the present challenges on the macroeconomic and geopolitical level, as well as the negative further sentiment of the direction of economic development, the banking sector managed to maintain its main function and to continue lending, the growth of which is over 12 percent year-on-year, of which the largest the amount was directed to lending to the economy. In addition to continuing to finance the growth of new loans, we strive together with our clients to assess the impact of economic trends on their business, then to help them maintain liquidity, but also to choose areas in which they will continue to invest and grow with an increased dose of caution. The level of non-performing loans of the sector is 3.26 percent, which indicates that banks do not have an accumulated legacy of problem loans and that they have the risk capacity for additional financing. both the economy and the population. In Erste Bank, the level of non-performing loans is even better than the average of the banking sector. We want further growth in market share and plan to stay with our clients even in these less favorable circumstances, so we do not expect significant changes in standards and a more conservative credit policy.

How do you assess the continued consolidation of the Serbian banking market? Do you expect new acquisitions and mergers of banks in the coming period?

– The trend of consolidation of the Serbian banking market is certainly expected and it can even be said that it started in 2005 and 2006 with the entry of several foreign players who are today the leading banks in Serbia. The process slowed down after the global financial crisis in 2008, then resumed in 2016, since then it has intensified. It is inevitable that banks will try to achieve satisfactory profitability by consolidating, fighting with competitive pressures, both in traditional business, and with external pressures from fintech companies. It is not easy to determine the optimal number of banks, both for our and other markets. What is the right measure depends on the development and habits of the clients, and time will tell us what that number is, Biznis writes.