by SvG on 10 August, 2010
Recently we attended a wedding in Bucovina. The young couple lived in the USA but both were born in Romania and wanted to celebrate their religious wedding in Romania with their friends and relatives.
At a moment during he day, the subject of housing came up. Proud and enthusiast the young couple told us that they had just managed to buy an apartment in Chicago with a very advantageous financing.
Good Score Means Cheaper Credit
They explained that for years they had carefully managed their credit score so that they could benefit from a better interest rate. They took care to pay all their bills on time and would only take a few credits cards from the major providers. They made sure not to use them up to the limit and always repaid more than the minimum on their monthly installment. This way they had managed a good credit score and had access to cheaper credit.
Not The Same In Romania
They were surprised to hear that their strategy would have worked only partially in Romania. Here banks don’t have access to information about payment behavior of (potential) clients outside the banking sector. Payment behavior is – not surprisingly – constant over different industries. Someone who has a bad track record in paying bills is also more likely to have problems with repaying loans and the other way around. For that reason someone who takes a credit risk on a person (or company) would like to know what payment behavior history this person has. This is not only the case of banks, mobile phone operators and many others also take risk on individuals and companies. If they don’t get paid they have a loss. These losses are taken into account when setting the pricing of products. For that reason in the USA and many other countries people with a good payment behavior are considered lower risk by banks and get lower interest rates on their credits.
What About The Credit Bureau ?
In Romania, banks use the credit bureau to share information about the payment behavior of their clients. Mobile phone operators have their own system and there are vast amounts of data available about payment behavior at utility companies. So, all the information is available. The problem is that in Romania banks and utility companies are not allowed by the regulators, in this case the Consumer Protection Agency and The National Supervisory Authority For Personal Data Processing, to access information about payment behavior in each others businesses.
The question is now why the regulators in Romania have decided that responsible individuals with a good payment behavior, – like our young couple in the USA – may not benefit from this and on top have to pay also for the bad behavior of others.
Romania Needs Lower Rates
I cannot open a newspaper without being told that we need lower interest rates in Romania. Indeed, I agree, especially for the 80+% that is paying on time and producing and will have to pull the country out of this crisis. It is clear that it would be better for the economy to have a lower cost of credit for those that deserve it and to stimulate others to have a correct payment behavior. So why aren’t banks, mobile phone operators and others allowed to share payment behavior information ?
Sometimes I hear the argument that it is not fair to punish someone for not paying a bill late once. That is of course not the issue. Banks are interested in behavior and not in incidents and even then, it doesn’t mean that those with less than perfect payment history are cut off from credit, they just have to pay a bit more.
I have my ideas about this approach for Romania in the current state of development. But it is not up to me to decide that people with good payment behavior should pay more in order to cover the losses caused by the ones that are not paying. This decision is up to the regulators. I can only point out that there is a cost to this and that this doesn’t seem to be aligned with the declared interests of the country.
Which Consumers To Protect ?
Consumer protection is of course needed in Romania but we need to make up our mind about which consumers need protection. Maybe one day politicians will find out that it is better for the economy and the majority of their voters (the 80+% that pays on time) to have lower interest rates, made possible by lower risk costs.
Sometimes people try to make things look better than they are. Breast implants, leasing Rolls Royces- I understand there are still a few repossessed ones for sale – statistics and politicians come to mind.
Sometimes people try to make look things worse than they are. Doom sayers, former bankers that like to be quoted again and politicians come to mind.
Often this is discounted by a healthy dose of skepticism. My father was and a good example, he used to say about a certain politician that when his lips were moving he knew the man was lying.
This is however not always the case and some people will believe things as presented. Too bad, it happens. Much worse is a situation in which things are presented worse than they are but the suspicion is that things are presented rosier than they are. This is exactly what happens with non-performing loans in Romania.
Non Performing Loan Levels Are Overstated in Romania
The latest example is the Financial Stability Report 19 by the National Banks of Austria. It analyzed the levels of non performing loans in SECEE countries. Romania came out as the worst but one (only Ukraine was worse).
This was commented upon in the press ( without mentioning the small print that data are not comparable across countries, but that is another story)
For the casual reader this looks pretty bad. However, every professional in Romania knows that the official figures are drawn up according to Romanian Accounting Standards. These local standards (RAS) have two features that inflate non performing loan figures in comparison to international practice.
Romanian Accounting Standards Inflate Non Performing Loan Levels
The first is that in Romania banks are not allowed to write off loans unless all legal means have been exhausted. This means that, even though the possibilities to recover the amount are minimal and the costs of the recovery efforts are above the amount that will be recovered, banks may not write off the – already provisioned – amount as loss. As a result, in comparison with other countries where banks write loans off after 180 days past due, Romanian non performing loans percentages are higher. This is a bit like reporting a dead patient in a hospital as just ill, because the death certificate may not be signed yet.
The second difference is that banks have to accrue interest on loans that are non-performing. If a customer has not been repaying the loan for more than – say – 180 days, then it is rather unlikely that he will pay the future interest. For that reason international practice is to stop accruing interest after 180 days past due. In Romanian Accounting Standards this is not allowed, so banks book interest income and – because they will most likely never receive the amount – create immediately a provision for the same amount . It will be no surprise that this increases loan loss provisions. Why recognize something as income and simultaneously provision it 100% ? Better not to book it at all.
By the way, writing off or not accruing of interest doesn’t mean that banks will not occasionally recover amounts that have been written off, including interest that is not accrued for. Accounting doesn’t change the legal relationship.
Also, not writing off provisioned loans doesn’t affect the profit or loss of a bank. The loss is already provisioned.
Banks Use International Standards Anyway
So, the question is, why are we (still) doing this in Romania? Banks have been asking for this to be changed for a long time. Not only because it makes them look worse in comparison with banks in other countries which creates the need to point out all the time that things in Romania are not as bad as they seem. The second part is that banks in Romania also prepare their financials according to International Financial Reporting Standards (IFRS) anyway. Because banks abroad don’t understand RAS, they ask for IFRS financial reports before entering in business relationships. So the RAS reports are just more work for banks in Romania.
Romania need a lower country risk premium
This is not something that is only of interest for banks. When analyzing a country, indicators like non performing loans are an important indicator to assess the economical situation of a country. Showing higher levels of NPLs in comparison with other countries will impact the so called country risk premium. Higher country risk means higher financing costs. This is very important when you have a big budget deficit to finance. The Romanian state needs to finance billions. Even a minimal improvement in rates saves millions. So, here we have a measure we can take that doesn’t cost any money and will save us money. Why not take it ? There is no need to try to present the situation any better than it is, but worse ??
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