Gent Sejko: The economy and banks, present and future challenges
Speech by Mr Gent Sejko, Governor of the Bank of Albania, at the round table on "The
economy and banks, present and future challenges", organised by the Bank of Albania and
Government of Albania with the banking system, Tirana, 16 September 2015.
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Your Excellency Prime Minister,
Honoured representatives of international institutions,
Dear bank executives and representatives,
This meeting seeks to once again draw the attention on non-performing loans, an issue that
has been discussed extensively over the recent years. It aims at fostering the shared and
concrete commitment to reduce the stock of non-performing loans, increase the financial
intermediation by the banking sector and underpin Albania's economic growth.
Following, I would like to list some facts.
The high level of non-performing loans has not affected the banking sector's stability.
Liquidity and capitalisation indicators remain adequate and the financial performance has
been positive and improving.
But, the still-high percentage of non-performing loans has contributed to a higher perception
of risk by banks; in turn, they have adopted a more conservative approach to lending.
Our survey data point to tightened lending standards; meanwhile, the lending volume, albeit
positive, is still considered as low.
The credit quality has improved during this year. The non-performing loans ratio, after
peaking 25%, fell to around 21% in July 2015. We believe this improvement reflects the
measures taken in the last 2-3 years, of which I would like to single out:
a) Amendments to the law "On income tax" at the end of 2013, to facilitate the loan
loss write off from the balance sheet;
b) Amendments to the Code of Civil Procedures in September 2013, to improve the
collateral execution process;
c) Entry into force of a regulation of the Bank of Albania, which renders obligatory the
write off of loans classified by banks as "loss" for a period longer than 3 years;
d) the work accomplished in cooperation with the commercial banks to restructure
loans when the borrowers are exposed to more than one bank;
Albeit the number of non-performing loans subject to the execution process has been
significantly up, the improvement of the credit quality reflects mainly the loan loss write offs
from banks' balance sheet.
For the first half of 2015, its value amounted to around ALL 11 billion. The write off from
bank's balance sheet is both healthy for the bank and useful for the economy, as it:
- provides a more realistic picture of the banks' loan portfolio, releases the capital and
improves their financial balance;
- improves bank processes, thanks to a more efficient use of human, financial and
technical resources, and redirects the focus of the bank toward new loans;
- improves the overall functioning of the financial market, as it contributes to the
market "exit" of non-competitive businesses.
- contributes positively to the market participants' assessment of the banking sector
(ratings) and, subsequently, to the assessment of Albania's economy;
- provides conditions to better manage debt collection, but always accompanied
with the necessary message that this does not imply forgiving the borrowers
debt.
In our case, the process of loan loss write off from banks' balance sheet is not a detached
process from real developments. On the contrary, it reflects the gradual improvement in
nonperforming loans.
In concrete terms, over the last two years, the growth rate of non-performing loans has
decelerated at extraordinary rates, banks' annual spending for provisions has fallen, and new
loans, especially those denominated in lek, have been stable.
On their side, banks have been increasingly committed to this process. Usually, it happens
when the effectiveness of the process improves and/or banks expectations for lending
improve.
Ladies and gentlemen,
I would like to point out that although the credit quality has improved, the level of
nonperforming loans is considered as still high, and it should be lowered at a faster pace. This is
a complex process that puts to test the adequacy of the legal framework, as well as the
coordination and consistent implementation of institutional policies.
These challenges were identified in the Annual Forum organised in June. Some of them
acknowledge the need for improving the legal framework. Others point to unifying, in a single
law, important stipulations about the execution of executive title, which are currently
envisaged across several laws.
We should be aware that a part of the difficulties arise from the dimensions of this problem;
also, until a while ago, the justice system lacked the experience and specialised expertise on
these matters and is still facing inadequate capacities to handle such practices. However,
inadequate legal provisions and their inconsistent implementation in practice render the
collateral execution process tedious, uncertain and costly for the parties involved.
The coordination of institutional policies is another key process to respond to various
problems in a timely and appropriate fashion. For example, the recent Action Plan for the
resolution of non-performing loans represents a new level of communication and
commitment of public institutions and the Bank of Albania to find a sustainable solution.
Many of the issues concerning the banking industry, which the Bank of Albania considers as
crucial, have been incorporated in this Plan. For example, the preparation of the draft law
"On bankruptcy", a commendable effort by the Ministry of Justice represents a significant
development and unique opportunity to render the resolution of a financial obligation as an
enforceable, predictable, and efficient process.
Concluding, I would like to underline that reducing the level of non-performing loans is
closely related to the magnitude of financial intermediation by the banking sector.
The need to redirect private investments towards new sectors in the economy, the small
market size, problems related to the low quality of financial reporting by private entities, and
slowdown of economic growth rates in Albania have dictated an unstable private demand for
loans .
Therefore, it is important to find, in addition to macroeconomic policies, new alternatives to
boost domestic demand, promote optimism in the economy and contribute positively to
businesses and consumer expectations. The acceleration of economic growth would provide
the conditions for faster and steadier improvement in the level of non-performing loans.
Thank you!