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Iurie Gotisan, October 25, 2005
Authorities take commercial banks to task
The bank system in Moldova has visibly developed the past years in spite of a not very favorable external environment. Indicators of financial position of commercial banks have remained relatively high, while year 2004 confirmed this evolution one more time. The nongovernmental credit rose by almost 50 percent. A boom of credits for individuals marked year 2004 and the nine months of 2005, as loans released to population rose by 44 percent and this evolution demonstrates the dynamic of development of the domestic bank system. However, the chief of state and prime minister described the contribution of commercial banks to development of the real sector of economy as poor, in spite of the stable situation of the bank system.
President Voronin urged commercial banks at the Investment Climate in Moldova forum of businessmen to reduce the interests on credits for enterprises. In turn, Premier Vasile Tarlev "has solicited" banks to lower the interests on credits in lei down to 15 percent by late 2005. However, it seems to us that both the chief of state and premier hurried up to demand the sudden reduction of bank interests on credits, and their demand probably lacks a deep analysis of the situation. We do not think that a 4-5 percent reduction demanded by Premier Tarlev in such a short period till late 2005 would have positive effects on economic system and on economy in general, at least at the beginning. Indeed, the market economy rules do not admit the direct involvement of the state in economy.
However, we will try to argue at least from two points of view and to say that the statements came in a hurry. Of course, a reduction of interest rates is needed, but, first of all, the economic theory says that such a sudden reduction would lead to a credit boom (especially of consumption credits), and this explosion would increase the inflation a lot. In addition, if such a high reduction of interests on credits is accepted now, the surplus of liquidity on monetary market would grow, and this liquidity exists now on market. In turn, the excess of liquidity would be observed for sure in the rise of prices of consumption products, and this growth would be visible in all sectors of economy.
Since the economy of Moldova is an economy of consumption, not of production (for the time being), the trade deficit and deficit of current account would grow on basis of the rise of consumption and consumption credits, and this is not bad at all costs. As for example, consumption credits increased sales of household appliances very much the past two years. Under these conditions, the growth pace of credits, especially of consumption credits, runs counter capacity of economy to react to expansion of the demand immediately, so that an external unbalance is registered on account of some massive imports. Branches that crediting should encourage, it means producers of consumption goods, are slowly developing.
As we have earlier said, a significant reduction of interests on credits would increase the consumption and resuscitation of some big inflationary tensions.
Secondly, money is also goods. Those who had attended political economy courses in institutions during the USSR period remembered this postulate for sure. If the price of some goods were dictated, then many people would be tempted to demand lower prices for all other goods. De facto, nobody tries now to dictate the prices, nor even for bread. Do you think that it is so easy with bank credits - suddenly by 5 percent within three months?
A reduction of interests is normal and necessary, but it must be gradual and differential. It means that interests on investment and production credits be lowered, but interests on consumption credits should remain unchanged for the time being. The market must follow its way. This way the economic system would avoid a deep crisis associated with high inflation rates. An overwhelmed inflation and a substantial depreciation of the national currency would be the consequences of such actions. Some states in Latin America demonstrated such evolutions in the 1980s, or some countries in Central Europe such as the Czech Republic or Poland did in the 1990s, when their payment incapacity associated with political implications in financial-bank system turned into the most serious inflation.
Businesspersons and banks - on different sides of barricades
On the other hand, to be in the shoes of businessmen, we should mention that the European Bank for Reconstruction and Development has opened special credit lines cheap enough in several local banks. The EBRD takes an interest rate from 0.75 percent up to 5 percent from banks, while credits are released for 5-10 years. However, banks increase 2-3-fold the interest rate on credits granted to businesses and make them inaccessible for a long-term. If banks released credits for at least 10-12 percent, not 5 percent, we think that it would be easier to businesses that receive them to enlarge their activity, to finance their investment and production spending or to employ more people.
At the same time, we would also award victory to banks when they oppose the reduction of banks, since the very high arrears of enterprises towards banks or existence of an exaggeratedly large volume of non-modern credits would be one of reasons, which make the latter increase the interests as means to maintain a minimum liquidity of financial activity. We do not justify the construction of some sumptuous headquarters or exaggeratedly high salaries in bank sector, though they are not valid in the entire system, but we think that the bank sector has managed to avoid a system crisis in spite of all difficulties that it had to get through, and we would indicate the 1998 financial crisis as example in this regard.
The chief of state warned that an international bank will join the market and "would overturn" the interest policy of local banks. The idea of the president is not bad at all in general, but we do not think that the solution to attract a foreign bank would be the best one for reduction of interests, though the presence of a financial-bank institution from other country could be an example of crediting for local bank operators, while its assets would be several fold larger than assets of all banks in Moldova taken altogether. As for example, the total assets of the bank system in Moldova (more than one billion dollars) are similar to assets of a bank based in the town of Bethesda, a suburb of Washington with about 60,000 residents.
However, let's remember the service of some foreign banks which had worked in Moldova such as the Turkish-Romanian Bank, the Greek bank that went bankrupt. Indeed, the presence of BCR or ProCredit, a special crediting institution with entire foreign capital, on domestic market does not mean that they contract credits for lower interests than on the entire system. In addition, the presence of an international bank on domestic market would mean that the entire profit would leave the country. It would be ideal to create a state-owned investment bank, an idea discussed for quite a long time, and we think that financial resources would be found. Remittances of Moldovans who work abroad could be used for the time being, and, of course, if the state promotes an adequate policy to attract these means.
We have said above that the bank system faces a surplus of liquidity, so that it does not know what to do. It is a paradox that banks do not fight for clients through reductions of interest rates under such conditions. Indeed, a true competition in the Moldovan bank system is impossible in such a conjuncture. The structure of Moldovan bank industry is very close to the structure of a collusive oligopoly.
We think that the problem is here. To be more clear, we mention that the five leading banks in the country perfectly understand each other regarding the price strategy. A true cartel was created on market. The other banks, the small ones (because we do not have medium banks), cannot meet the crediting demand of the economy. In addition, their credit portfolio is much worse than of big banks, and this requires the creation of additional reserves and disfavors the policy of small banks regarding reduction of crediting price. Thus, everything is in hands of big banks.
As a result, the structure of the Moldovan bank industry should change. The idea to open the market to big foreign banks is welcome. There were speculations last summer that Austria's Reiffesen Bank is interested to join the Moldovan market. On the other hand, there are "gossips" that the National Bank of Moldova is informally opposing (the lobby of big banks is the evident cause), saying that it unfits some interests. The chief of state is right in principle when he says that the entry of a big foreign bank would bowl over the cartel.
Probably this proposal of President Voronin is coming as a threat. This threat is a proof that the authorities know the undesire of big banks for a stronger competition. Nor the political interest is excluded here. Otherwise, the state would sell its majority package of 51 percent in the Savings Bank to a foreign bank long ago.
Instead of conclusions
At the same time, if banks reduce the interests on credits, they would be tempted to lower the interests on deposits of population as well. In addition, they would have to ensure at least 2 percentage points over inflation rate on deposits to depositors. Imagine that the interest rate on deposits of population on bank system would be 6 percent, for example, while the inflation rate is 10 percent; there is a clear risk that depositors could stop saving their money in banks. It is well known that bank deposits come from financial resources of population attracted on deposit accounts of banks. However, financial experts describe the money from bank deposits as "short". Finally, why should we demand cheap and long-term credits from banks since clients might withdraw their money at any moment, depending on interest rate on deposits and inflation rate? However, current trends of prices raise concern, if taking into account the exorbitant rise of fuels prices, which is reflected in most of consumption prices.
We do not believe that international financial organisations, the International Monetary Fund or the World Bank, would accept this state of things, it means the reduction of interest rates, since we know well that they are adepts of austere policies. A law would be the solution to this situation. It would be ideal if businessmen propose a draft law to the parliament, a law which would oblige the National Bank of Moldova to demand commercial banks to reduce the interests. BNM is the bank of banks, not of the state, being responsible only in front of the parliament. Thus, as a proverb says, the goat would be full and the cabbage would be whole.