High Fixed Interest Margins in Romania

by Steven van Groningen on 25 October, 2010

Last week an article appeared in the Romanian financial newspaper, Ziarul Financiar, with the title “How is it possible that in the year 2010 in Romania, an EU member state, the banks practice fixed margins of 9% for credits?”.

Like many articles these days, it seemed to be written with the clear purpose of bashing banks. Of course, everyone has the right to express their opinion but it would be preferable if they stick to the facts.

This particular article clearly mispresented facts. When I found out that the author is a professor at the Romanian Academy for Economic Science (ASE) my conclusion was that we have a problem. Either  the professor doesn’t understand some basic facts or maybe he does, but decides to mispresent them to readers in the leading financial newspaper. I have no way of knowing which of the two is the real problem but decided to write an article for the Ziarul Financiar, which was published today.

The English language version of my article follows below. I left some sentences in that cannot be found in the newspaper version and have added a few links and headings. The Romanian version can be found here.

My Article in Ziarul Financiar

Recently an article appeared in Ziarul Financiar with the title: ” The opinion of Dan Armeanu : How is it possible that in the year 2010 in Romania, an EU member state, the banks are practicing a fixed margin of 9% for credits.”

I didn’t know who Dan Armeanu was, but I read that he is an university professor at ASE and I thought it might be a good idea to answer his question. When I was still a student, professors asked difficult questions to which they knew the answers themselves. After reading the article I realized the professor asked a simple question to which he didn’t know the correct answer question himself. I do, and I’ll present it here.

I’ll first use  facts to answer this question. At the end I’ll also give my personal opinion about the level of interest rates in Romania.

So, first the question. I’ll use the example given by the professor, a credit in euro, converted to EURIBOR plus a fixed margin of 9%. Maybe it is good to explain at this point that I don’t work for the bank the professor refers to. My interest is to have a better debate about what is happening in the banking system and I am trying to make a contribution with this article.

Variable interest rate credits have two interest components. A variable part and a fixed margin. The variable part fluctuates in function of the financing conditions on the financial markets. The fixed part covers administrative expenses, risk costs and the banks profit. In order to get to the fixed part we’ll deal with the variable part first.

Variable Interest Rate

Components that fluctuate in time are EURIBOR, Country Risk Premium, expressed in CDS, and the cost of the mandatory reserve at the BNR. Together these components reflect the refinancing costs for a bank.

About the variable part the professor wrote: ” EURIBOR is quoted at the moment almost 4 percent lower than at the moment of the signing of the contract. This means that the banks have an additional profit of almost 4 percent by just applying a simple artificial measure.”

I don’t know if this statement is a deliberate misstating of the facts or a demonstration of incompetence. Maybe some parts of the academic world have indeed declined as much as some claim. I don’t know. What I do know is that EURIBOR is the rate at which euro interbank term deposits are being offered by one prime bank to another within the EMU zone. I suppose there is no need to explain that Romania is not part of the European Monetary Union.

Where Do The Euros Come From

In order to be able to give credits in euro, banks first need funding in euro. Because of the mandatory reserve requirements we need 100 EUR in order to give 75 EUR credits. Where do we find the euro? Most of it comes from banks in the EMU zone, including the parent banks. Do those banks give us the euros at the same price as which they give it to “prime banks in the EMU zone” ? Certainly not.

We have to pay more because Romania is considered a country with a higher risk. In the same period in which EUROBOR went “almost 4 percent lower” the country risk premium has increased with 6 % and came down again to about 3%. So we cannot say that the banks in Romania have an additional profit of  4 procent because EURIBOR has dropped, as the professor wants us to believe.

So, the fact that we are not in the EMU means that the refinancing cost for credits in euro is not EURIBOR, but EURIBOR plus Country Risk Premium. Because we are in Romania we also need to add the cost of the mandatory reserve at the National Bank of Romania (BNR) to it.

The Fixed Margin

With this point clarified we can now move on to the fixed margin. Let me give some figures that are valid for credits in euro in Romania in 2009 (2008). These numbers are based on the statistical reports from BNR.

Administrative costs were 4% (4,5%), the cost of the reserves 1% (2,1%) and the risk costs 2,1% (1,4%). Including the cost of the reserve in the variable part we need a fixed margin of about 6% in order to cover the administrative costs and risk costs only, assuming a zero profit margin. Because we are looking at the costs for the whole system we are talking about an average. In practice a fixed margin is smaller for guaranteed loans and bigger for loans without guarantees. In our case, this is not important because we speak about the mechanism.

So now we get to our question. If, on average, a margin for a credit in euro of 6% seems reasonable when we take a look at the statistical data for the system (as opposed to taking one example and extrapolating it) and assuming a profit margin of zero, why do we have clients with credits with a fixed margin of 9% ?

Our professor has the following explanation : ” Why are some banks practicing such big margins? Because this is permitted by law,” somehow creating the impression that banks do as they please.

The reality is the exact opposite.

The Law Imposed High Fixed Margin

Not the banks, but the law, Government Emergency Ordinance  50/2010 (OUG 50) imposes a big fixed margin on clients. Banks have no option here. The only variable element that is allowed is EURIBOR, all other elements need to be in the fixed margin. Banks were obliged to amend all existing credit agreements to reflect the formula EURIBOR + fixed margin. So if a client had a credit with a total interest rate of 10% (to stick to the example) before OUG 50 came into force, with EURIBOR at 1%, the margin becomes 9%. That is how we get to our 9% margin. It is imposed by the law, not by the banks.
If we go back for a moment to our calculations based on the system average we’ll see immediately that the difference between the 6% margin that is the result of our calculations and 9 % that is imposed by OUG 50, represents the country risk, which stands now at about 3,5%

The Frankenstein Credit

OUG 50 has moved the largest part of the funding costs into the fixed margin. In its desire to create transparency OUG 50 has created a Frankenstein credit, with a large part of the variable costs in the fixed margin. Transparent, maybe. In the interest of the client ? No. In case of a variable rate credit a client should benefit when refinancing costs are decreasing. Now the client benefits only in the unlikely case that EURIBOR  drops any further but in the more probable case that the Country Risk Premium drops, the client doesn’t benefit. Of course, banks may reduce their fixed margin but is it not difficult to see that this effect will take much longer now that an increase of country risk may not be passed on to the client. I mentioned all of this earlier in this post.

Credit is Expensive in Romania

Now my personal opinion. This is not something new and I have said it already numerous times. Credit in Romania is expensive and needs to come down. How? We have 5 levers that we can pull and they are labelled: Country Risk, Administrative Costs, Risk Costs, Reserve Costs, Profit Margin. Now that the banking systems is loss making according to the data published by BNR, the profit margin of the banks doesn’t offer many possibilities.

The More Interesting Question

A more interesting question would have been : Why do we have high interest rates in Romania ?

{ 37 comments… read them below or add one }

IONUT October 25, 2010 at 09:37

Mr. Stevens, please tell us why romania has a 9% loan and Greece which has a higher country risk is 3% interest.
Is it fair that all of the Romanian oil fields belong to Austria? and the contract is confidential.

OMV gave bribes for this contract
how do you think will endure?

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SvG October 25, 2010 at 09:56

Greece is part of EMU, the national currency is euro. People save in euro, their capital market is in euro. In Romania we don’t have the euro and people save mostly in RON. Banks in Greece don’t need to go to the international markets because they have a deposit base in euro. Their government does, because they spend more than they collect.

I am not a specialist in this field and this is off topic but believe that all Romanian oil fields belong to Romania. The Romanian state may give exploitation rights – a concession – to companies. I suppose you are referring to the fact that some of those contracts are awarded to Petrom, a Romanian company with majority Austrian shareholders. I don’t know about bribes, if you know about this you should inform the authorities. Anyway, it is off topic and let’s not continue this thread.

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N October 25, 2010 at 10:07

“Why do we have high interest rates in Romania ?”
My answer: because sometimes the bank wants it that way with no regard for logic. Take one example: fixed margin of aprox. 27% + euribor after the second year of restructuring a loan (and last possible). Yes, with raiffeisen. How can they think that after 2 restructuring requests someone will be able to pay such an amount without a miracle happening? Rhetorical question?
P.S. Sorry for bringing the argument to such a low level … but this is the level I’m working with.

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SvG October 25, 2010 at 13:06

First, this is my personal blog and I don’t want to turn this into a forum for discussing individual cases, so let me try to answer in general terms. Restructuring of loans takes place in order to create a temporary reduced monthly installment for the client. Depending on the case, often the best way is to charge a lower interest rate for a period of time. Just charging a lower interest rate would reduce the net present value of the loan for the bank. This would mean provisions for the bank and default for the customer. The whole idea of restructuring is to avoid default. For that reason the lower interest rate during the restructuring period is compensated by a higher interest rate after the restructuring period in such a way that the so called Net Present Value of the loan is not affected. The high interest rate you mention should be seen in combination with the very low interest rate during the restructuring period. Not all customers will be able to pay this after the restructuring period is over and some will default. I still think this is better than defaulting all customers with payment problems right away. So, there is a certain logic….

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Marian October 26, 2010 at 12:43

“Not all customers will be able to pay this after the restructuring period is over and some will default. I still think this is better than defaulting all customers with payment problems right away. So, there is a certain logic….”
This is a very good logic for the bank indeed as long as the future will follow the pasts statitstics. But what if “some” proves to be “a lot” due to crisys or whatever other reasosns we could find here in Romania, and what if those that are not in default yet and have the necesary income will refinance their credit with another bank instead of paying the 26+Euribor interest to Raiffeisen? Wouldn’t it make more sense to realy help the customer by lowering the interest rate and thus lowering the overall rate at which customers default? This is looking from the point of view of the bank.

Now, looking from the point of view of the customer how can you trust a bank and remain a faithfull customer when you see that you are dictated a banckrupcy sentence with one year stay? How can you accept an explanation like the one you gave Mr. Groningen when you know that there are banks in Romania that somehow manage to offer interest rates like 6% or 7% + Euribor?

I see that you don’t want to get into specifics because yes when you speak in general terms is much easier for the banks to pose as victims and/or saviours. The general is irrelevant to each customer that has 26%+Euribor interest rate and might even be considered a lie by some.

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SvG October 26, 2010 at 23:18

Please don’t take what I wrote out of context. We are not speaking here about regular case. We are speaking here about customers that could not pay their monthly installments In order to help these customers they get very low interest rates for 1-2 years which reduces their monthly installment by as much as 50% After this they will face higher interest rates as explained above. There will always be customer that cannot repay their loans, it is a fact of life. even though both bank and customer would like to avoid this. If this happens both have to accept the consequences.

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Marian October 27, 2010 at 15:59

I know very well that the 26+Euribor interest is aplied to those people who have aplied for restructuring and yes, I know, not all get this interest (maybe some get a higher one and others get a smaller one). The point I was trying to make was that when you say that you “help the customer” you realy mean “help the bank”. By lowering the interest rate for one year (somewhere around 2%) and then raising it very high to 26%+euribor, you postpone the moment at which the bank has to make provisions for this credit and this way you can report a higher profit this year (as Raiffeisen did this year if I rememeber corectly) and postpone the risk for the next year when probably 85% of those restructured will pay the highly increased installments; even if the percentage is much lower than 85% they will pay much more than prior to restructuring and coupled with the hoped exit from crysis the bank will not have to make profit depleting provisions.

I know restructuring is an old banking tehnique and I do not blame the banks for using it but you can’t ask me to believe that a 26%+euribor interest rate is justifiable for the next 10 years just because you gave one or two years of 2% interest rate; it is not justifiable and also the 4% adminstration costs are not justifiable .

Usually when two partners (as the bank and the customer should be) find themselves in a dangerous situation (one not being able to pay his loan the other risking to make provisions and incur costs for collection and possibly execution) they should each make concessions so that the deal does not brake (the customer agrees to keep paying but a smaller amount for a determined period and the bank accepts to get less profit from that loan). Instead what’s happening is that indeed the customer accepts to keep paying a smaller amount but after one year the bank wants a LOT more profit (than originally planed) from the customer. That doesn’t look like a fair deal to me but maybe I am subjective or misinformed.

P.S. I really appreciate and congratulate you for the fact that you blog and for taking the time to answer the comments although most of us are clearly less prepared in banking and not as coherent as you in this field.

N October 26, 2010 at 14:56

I will try another answer to your question: Shareholders greed amplified by one track minded managers whose only interest is to “milk the cow until it dies” in order to please their employers. When this corporate machine meets a market with no financial expertise and very big appetite for things they see on TV , it devours it, infects it and eventually this process ends in the emancipation of that market and then moves on to other “barbarians” that need civilisation. So, in the end, all these “default customers” are most needed sacrifices on the altar of “financial wisdom” and correct business relationship .
P.S. I accept your “general terms” in trying to explain loansharking. Thank you for your time!

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SvG October 26, 2010 at 23:27

More than 85% of all customers pay their loans without any delays, some of them with difficulty, but they pay. This fact is sometimes forgotten.

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zalex October 25, 2010 at 11:34

Excellent article, Mr. van Groningen! A question: EURIBOR + Country Risk Premium + the cost of the mandatory reserve at the BNR goes ALWAYS together? I mean, if the bank doesnt tell me that i have to pay what’s after EURIBOR in this equation and i know that my rate is EURIBOR + fixed margin it is incorrect to say that the bank ought to reduce my rate (at least over the last two years) ? Or the Country Risk Premium + the cost of the mandatory reserve at the BNR is implide when we are talking about an EURO loan?

Off-topic: congrats on your Bucharest Marathon result!

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SvG October 25, 2010 at 12:25

Thanks for the congrats ! Regarding your question, different banks have followed different ways of communicating this with their clients. At the end of the day all 3 factors play a role in establishing pricing, some included all of this in their internal rate, some not. For you as customer matters only what is written in your contract, not what is implied. A credit that was exclusively EURIBOR + fixed margin based in the past should indeed have seen a reduction of interest charged over the last 2 years, because EURIBOR came down. I would think that most (all?) banks have clauses that take also country risk and/or reserve into account. This didn’t help transparency and it is good that a debate about transparency is taking place. Before OUG 50 banks could absorb fluctuation of EURBOR + Country Risk Premium + RMO in their calculations. After OUG 50 EURIBOR must be passed on other factors may not.

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Lavinia October 25, 2010 at 22:43

I know somebody in Raiff Bank, in the collecting department. I know from her that you hired a lot of people for this job lately, and also I know that before the crises you were paying team building in the mountains for employees, parties, and other such things. This weekend they were at the mountains for a football match with other guyz from other countries, everything paid by the bank, this while some of the clients maybe don’t have enough to raise their kids decently for paying back the bank rates. But they had to pay for a weekend in the mountains, one of many others, for some of your employees. Cool one!

My point is that you should do something with the administrative costs. First, don’t imagine that only for being called by the bank some people will end up running to pay their rates. I wouldn’t be very sure about this one. I strongly believe that a system to send sms periodically to problematic customers would not do less than being called does, it’s an illusion that somebody will become from sudden more responsable just because he hears a voice. You could keep some of them, but most of them could be covered by another cheaper system.

Plus, there are people who are out of work and couldn’t pay anyway, but you pay 1200 ron to the ones calling them and announcing them they are behind with the rate, just as they wouldn’t already know it …! This is waste, under my personal opinion. So, first I would try to find a way to connect to unemployment database and see who actually is out of job, monitor his situation, and allow him to retake his payments to the bank after he finds another job, as somebody can’t be an unemployed forever, one day they will again have a job. And beside this I would create a system to send sms to customers and announce them everything they have to know by it. It would probably be much cheaper than tenths or 100 persons with around 1200 ron as a wage, or something like this, plus the taxes and contributions paid to the state for them.

Then, I don’t understand why do you have so many agencies. In my mother’s town, my native town actually, on the same street at around 50m there are two Raiff Bank agencies. Who’s sustaining those employees at work and the other expenses for the agencies? I look around everywhere and I see lots of agencies for all the big romanian banks, and, again, who is sustaining all these costs? Of course, the clients. This is why we don’t like banks at all. And the rest of the people in this country don’t even have the wage level of the guyz in the bank.

I don’t have a credit, I never had one, but I feel really sorry for the romanian people who has to sustain all this costs, including mountain trips for relaxing, which seam to me a really big party on their money, from their salary. I don;t have any problem with your variable part of the DAE and I strongly believe that it has to stay variable, this OUG is a bullshit. But I have a really big problem with your administrative part of the business, I strongly believe that you as a manager should change a little the strategy of the bank, should create more efficiency, should take better care of the internal costs, and, most of all, should know that if some employees need a team building in order to work at the highest level possible together it means they are unprofessional people and either they have to be fired, either they have to stop to receive such great wages compared to any other industry in Romania, as they don’t deserve it. Good luck!

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Viorel October 26, 2010 at 14:34

Lavinia, you’re missing a rather important aspect of all this: Raiffeisen Bank is a private venture. It doesn’t belong to the state of Romania or to its people, and it can be managed however the manager sees fit. Many of the problems we see as a country now come from the fact that we can’t get over our former communist mentality and embrace capitalism for what it is: (relative) freedom of profit through own means. You having to criticize Mr. van Groningen for investing in his employees is rude and childish. It’s not his or his company’s fault that the people who’ve contracted costly loans can’t pay them anymore, it’s the people’s fault they haven’t considered and planned for this. Everybody’s debts are their own responsibility — someone that could actually think otherwise has delusions about the “motherland” and the companies which populate it. If you really need a loan, you have to deal with what you get, not throw fault around: that isn’t helping anyone.

Regarding the academic levels in Romania: they’re plummeting to a varying degree in relation to the novelty and change factor of the academic area. That is to say that, for example, the Economic or Technical mediums fall short of providing students with necessary knowledge and competence to become good in their jobs because they’re outdated by decades, as opposed to the Humanist or Medical mediums, which are in slightly better shape. All this made worse by intelligence exodus and system corruption which promotes incompetency.

Back to the main topic: high credit costs are unfortunately a reality we have to live with for the next 5 years at least. This government (who sat doing nothing when the recession hit all the other large countries in the EU and abroad) has probably done damage that’s reparable in 2–10 years (provided it’s changed with a competent set of people, which is highly unlikely), which brings us to probably increasing Country Risk + Risk Costs in the short term. That means that, in my personal perspective, we’re losing prestige, trust and a lot of money by not being able to choose open-minded, practical leaders. They don’t have to be good — I don’t think we have any good leaders in the “market” today, because we haven’t learned what being “good” means just yet, as a country — they just have to be smart enough to listen to the right specialists and to the people who actually know what they’re saying, a trait that our political class is infamously bad at. Romania could’ve been so much better today if that particular problem would’ve been solved 10–20 years ago! Politicians and “influential parties” could have stole as much money as they wanted, just as they did so far, if they only made some sane decisions early on…

That’s why I, like many other people I know, consider Romania to be a sinking ship at the moment, and would probably take the first chance I get to leave.

Apologies for the many digressions…

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Tudor November 9, 2010 at 20:46

Lavinia, banks have so many agencies because people in Romania don’t know how or don’t want to use cheaper (for both the bank and the customer) channels like Internet banking or ATMs for simple transactions (transfers, utility payments, withdrawals).

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Stefan October 26, 2010 at 11:55

Al though not a (technical) expert on the matter I was wondering why it would not be possible for an Austrian legal entitiy (part of RZB) to issue solely (mortgage) loans directly to Romanian citizens whereas the loan is in “administration” by either Raiffeisen Romania or a special company vehicle in Romania? With the “European Banking passport” this should be possible and would eliminate a lot of “BNR” issues.

Wouldnt this then eliminate at least the RMO, and probably lead to a lower “country risk” rate as the loans are issued by an Austrian banking entitiy?

Of course if it is not worth it to do it in Austria, I assume there must be countries in the EU where you can establish a “RZB daughter bank” directly operating on the Romanian market with a much lower cost structure.

I am just thinking without of course knowing all the technical or legal consequences of such an idea, therefore please correct me if I am wrong….

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SvG October 26, 2010 at 21:50

Yes, Stefan, you are right, the European Passport allows banks (and other companies) that are authorized in one EU country to offer those products in other countries as well. Actually the whole idea of EU Directive 2008/48 is to improve transparency for consumer credit contracts in order to improve cross border competition. You are right that the main advantage now would be to avoid the RMO. Practice has shown that it is easier to source the loans in Romania and to sell them to an offshore entity with the same result. It is only a matter of time until Romania will become the hunting ground of foreign banks. All that is needed is a distribution channel. All the rest can be managed abroad in countries that have better regulations, lower cost base and larger volumes than we have. This is a real risk for Romania. Country risk would of course still exist.

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Lavinia October 26, 2010 at 14:04

@Stefan

Imagine you were a bondholder or a creditor. Would you give credit to some persons that live in a risky country, so this means in a risky and not very well performing economy, full of uncertainties of all kind, which is actually our case, without adding the cost of this risk to your money? I don’t believe so. It’s not about technical issues here, but is exactly that simple: nobody gives you his money without a certain extra cost for risk if he can’t trust you are able to pay it back without major issues. They set you a higher cost so that they are able to recover sooner at least the money they gave to you, the principal, for more certainty. This interest rates are something designed to reward somebody for being willing to renounce at his money for a while, and this reward is proportional to the answer of the question: do we have like all the chances in the world to get our money back always, in time, without any issue, or is not quite like that the situation?! It doesn’t matter if the money comes from Austria, Germany, Holland, or whatever. They are given to some people living and working in a not performing economy, which creates a risk regarding taking back at list your principal, not to say also about your reward. The problem is not from where the money comes but to whom the money goes. This is why they can’t do what you said :).

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mihai October 27, 2010 at 08:33

I read your articles and I found that you are a true professional in everything you say and show that besides the fact that you are trained in this area are very passionate and more than that you are not arrogant, obsessed with money and opportunistic like more than 99% of those in the banking sector.

and the photo camera that you have to confirm this:)

back to romania banking system have two questions for you:
1. Believe that banks that will lose their collective processes can recover their lost image, and thouse banks will be forced to sell their clients and to withdraw from the market?

2 Please explain how the following formula from a Bank of Romania
August 2007 : Euribor (4.2%) + x + 3.75 = 7.75%
August 2010 : Euribor (1.27%) + x +3.75 =7,75 %
x is the internal bank indicator

thank you

mihai

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SvG October 27, 2010 at 20:25

Mihai, thank you for commenting. There is very little I can say about the collective processes because so far there is only one bank where the process has started. I don’t know the situation or contracts at individual banks but I believe (just an opinion) that only the lawyers will benefit from these actions. They created unrealistic expectations and sold their services. In the case a bank would face big losses we can only speculate about the outcome. In the highly unlikely case that such a thing would happen, we cannot exclude that a bank that faces such a situation has enough of Romania and doesn’t want to invest more capital in Romania. In that case it could sell its operations or portfolio. Again this is wild speculation.
2. If I understand you correctly, you ask me to comment on the situation in which an internal rate of a bank has not changed where Euribor has come down 3 %. As also pointed out in my posting, banks get their euro from banks in the Euro zone because there are not enough euro savings in Romania to support euro lending. The cost of those euro is not Euribor, but Euribor plus the cost of country risk. The cost of country risk has gone up while Euribor came down, at a certain moment country risk was more than 6% over Euribor. Banks will in general want to keep their internal (prime/base) rates stable and not pass on short term fluctuations to their clients and only adjust when there are structural changes in their funding costs. Also, banks funding costs don’t fluctuate “real time” with Euribor or country risk because there is a mix of funding instruments and maturities and they will therefore be able to smoothen market impact on their internal rates.

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Edi October 27, 2010 at 15:37

Dear Mr. van Groningen,

I am not a banking specialist, I wish I were :)
What I do not understand in relation rate-CDS is the following.

As I know (ref:’Vienna Initiative’), most of the capital of the local banks (subsidiaries) comes from their mother banks.
Also, ‘mother banks’ like Raiffeisen / Erste etc have their own CDS quotation, which includes the risk of financing the daughter companies — as we see in Feb 2009, Raiff CDS was at a maximum (around 3%), due to its high exposure to Eastern Europe.
If the mother bank concludes CDS contracts (let’s say at the value of the sovereign default), and then refinances the daughter bank, this is ineffective because:
1. The cost for the subsidiary (‘marja’ + Raiff CDS + Romania CDS) would be much higher than the cost of directly getting financing internationally (let’s say at ‘marja’ + Romania CDS)
2. It would affect the own mother bank CDS rating (negatively), since the mother bank would increase its exposure.

Therefore a logical consequence would be that the mother bank does not conclude CDS agreements (or it does only partially).
Therefore the will of (at least some) mother banks to reduce their exposure.

As I understand, if a CDS is concluded, then the bank has no risk (except the insurer’s inability to pay – like in the case of a systemic crisis – see AIG).

My point is, and maybe you can correct me, that not the full sovereign CDS quotation should be used, but a (somehow) smaller value.

thank you,
Edi

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SvG October 27, 2010 at 20:41

Edi, your argument is not totally correct. The EU banks that would lend money to a Romanian banks would pay their own CDS costs for the EUR they attract from the market but receive the Romanian CDS from the Romanian bank for the money they lend to Romania. As long as there is a positive margin between the 2 CDS’ this can be done. So, the 2 CDS rates are not added up for the Romanian Banks.

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Edi October 27, 2010 at 21:40

Thank you for your answer, you are right, there could be a positive margin.
By the way, you have very nice pictures on your blog.
Edi

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Lavinia October 28, 2010 at 01:37

@ Viorel

Viorel, I think you didn’t got my point.

1. I’m not the communist type it’s just Mr Banker asked how do we cut the DAE, and I was trying to say to him that for the moment, in the short run, the administrative costs are the only solution as personally I think it should take some quarters for the romanian economy to perform better. So either you cut that either you don’t ask such a question.

2. It’s a question of business ethics, some people starve to pay you back and you don’t seam very willing to clean your own garden, and I will tell you why the banking system have about 50% of the fault for the situation in which we are. Which means that is not quite simple like: people got credit and is not bank’s fault they can’t pay back.

3. I thought it was up to anybody in part to do everything to develop professionally, that this is something personal and part of our life, and, more than that, part of our own personal pride, which, of course, is something specific only for quality persons … unfortunately. If you expect your employer to pay all kind of shits for you to develop professionally and personally on my personal opinion you have a problem as a human being and if I were your boss you would be fired as I wouldn’t consider you a quality employee. Everybody has to do all this things from they own initiative and using their own resources, because their are doing it for them, even if they work for somebody, they do it to get a wage, if you get the point!

4. I’m so tired to see that people always point out whatever government for our problems when is clear that non of us excel in nothing. And mostly on the crises, as in the boom nobody remembers we have politicians in this country and nobody analyze the gov. What about the crediting strategy of the banks? Do you have any idea what should a bank represent for an economy? What is your opinion about the crediting strategy of the romanian banking system before the crises? Who do you think is more culapale? Politicians, who anyway are stipud doesn’t matter who they are, or the banks which financed a lot of new buildings but not a lot of new factories for goods producing? Do you consider that an emergent economy should grow up from consumer spending and real estate business? I don;t quite agree, but this is what the banks did some years ago, and now of course we don’t produce enough, we don’t have enough business activity, and so we have a very serious problem.

5. I know better than you can imagine what is the CDS, this is why I propose start cutting the DAE with the administrative costs, sustained by another strategy in crediting, with most of the money to go to the companies and for investment projects. But you have to create some programs for this, assume some risks, which of course that the brilliant employees of the banks are not ready for, they are to busy going on trips on client’s money.

Cosmmunism is one think, and lack of business ethics is another. After you credited the economy like stupid, in the end some starve and some consider that it’s ok to party on their starving. I don;t have a credit, btw, I never had one, and I’ll never have one, I just ask myself how this can be possible. Of course their clients can’t go to the mountains not even on their own money, because they pay a high CDS which is a result, in essence, of a stupity crediting of the natioal economy, with no head and now tail.

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Calin November 1, 2010 at 13:09

@Lavinia…maybe some of your points have some solid truth in them but your language and tone is a bit NOT in your favor, imo.

I do agree there were some powerful campaigns in the past from banks to encourage the people to take credit for useless stuff, I also do agree that (and learned that fact on my own skin) after a certain limit, the banks are not anymore our partners in bad weather.

But I guess the Romanians must learn that in bed times it is very important to have an OPEN and HONEST communication with the collector from the bank, and to be transparent about their situations. I also do not agree with the mentality I found on the streets of Romania which goes like this: why should I worry to pay the debt back, the banks has anyway money so my situation is harder than them.

We all must learn from our mistakes, and personally I promised myself to give to the bank all the debts and not to borrow anymore.

Anyway, watching Steven yesterday on PROTV some ideas popped in my mind about what policies I would promote in my contracts and after that heavily advertising them if I was a bank’s CEO. Maybe they are at Raiff. but since I do not know about them it means they do not exist. :-)

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Adrian October 30, 2010 at 02:55

Mr. van Groningen, sorry to debate on your blog, but I guess Lavinia will not accept an explanation coming from you :(

Lavinia,
1. Cutting administrative costs may primary increase the profits, not decrease the amount a bank client should pay – there is a contract where that person took money from the bank on the legal binding to give back those money plus interest. How much the company pays for teambuilding is not a clause in the contract and will not transfer to him/her: that bank signed the same contract and will have to keep the part of the bargain and keeping the administrative costs is entirely the responsibility of the bank management, not client’s.

2. You need performance from employees also when it is an economic downturn (probably even more at those times) and what you see as a spending others see as an investment in people. How training is done and what is the benefit of teambuilding is something that the corporations are long looking into and I can tell it pays out, otherwise nobody will be doing it. So it is not about ethics at all, but costs and performance and please don’t forget that banks are on the market for business, not charity, and ethics in business means primary doing your part of the contract not breaking any laws.

3. You assume everyone is self motivated and smart enough to think the way you suggest – you are wrong. You assume people can pursue a lot of self-growth with 1200 RON salary – you are also wrong. You assume people will invest in training themselves, by coincidence, on what the company needs from them – wrong again. You assume your employer will wait for you several years to learn and grow – you are wrong, you have to be fit and productive as soon as possible, so your employer will evaluate you and send you to the most needed training in the first week or two. For many people a job is just the mean to get some money to pay for the beer and pay the bills, nothing more, so the employer will have to train them or fire them as incompetent (if they will get any job at all).

4. Banks are not doing a country’s strategy, banks are doing just business. Banks are not governing countries and they have responsibilities to their clients and I think most banks did their part of the contract. Don’t blame banks for not doing what they are not supposed to do, for responsibilities they do not have and for the people’s greed investing like hell in real estate just because the returns were huge. Banks are on the markets to loan money for those who need it, not to build a country, create strategies and invest in manufacturing plants – bankers are not engineers and have no expertise in manufacturing.

5. One can also suggest everyone minding his own business, bankers to manage their employee training programs, clients paying their loans, this is the only binding by the contracts they have. Why is your personal problem how a bank is spending money as it is not your money (unless you are a shareholder, but they agree with the spendings), it is not your business and it is perfectly legal, ethic and positive. Tomorrow you will ask the owner of the neighbourhood store to use cheaper shelves for the store, turn the lights off earlier to save on the energy bill and use less water when washing the hands because you want the savings transferred to the clients? Sorry, it’s his decision how to do business. You do not like it? Shop somewhere else or do not shop at all, that’s a perfect valid option.

Communism, I think, it is looking in somebody’s garden and asking why they have a pool when you don’t have one. Or asking a bank why doing trainings for employees when people are poor – do you prefer incompetent bank employees and people that are richer with a penny each?

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Catalin October 31, 2010 at 00:25

Dear Mr. van Groningen,

Please help me because it seems I miss something in your calculations.
According to your article, the fixed margin were of 7,1% in 2009; almost 1% lower as compared with 8% in 2008 (including administrative costs, the cost of the reserves and the risk costs). The Euribor also dropped in 2009 as compared with 2008. In these conditions how come that for Raiffeisen clients the total interest rate increased in 2009 as compared to 2008?

I am a Raiffeisen client, I have a credit for house, I paid all of my rates in time and my interest increased in 2009 by 1% as compared to 2008? Why is that, if the banks costs dropped?
I see this situation similar with the fuel price situation. If the Euro goes up by 1%, the fuel goes also up 1% also because they buy in Euro says the oil company. If the Euro drops by 1% the fuel drops only by 0,1% because they have stocks says the oil company.

Now, in 2010 a new Raiffeisen client receives a credit for house with 2,8% lower total interest rate than my rate and it seems that the costs are not such a big problem as you depicted. Is this fair for the old clients? In these conditions isn’t it a little truth in what Mr. Dan Armeanu said? Isn’t it the ACTUAL interest level THE FAIR level? Isn’t it logic to try refinancing my credit, benefiting also the OUG 50 which eliminated the commission for anticipated reimbursement?
We don’t ask for illegitimate rates; we just want a fair relation bank-customer.

Why all the big banks put pressure on the government to modify back the Ordinance 50/2010? The banks association and FMI say that by applying the ordinance the banks will suffer big loses. What are these loses as long as the banks afford to still clients from another bank by offering them better conditions?
In fact, in my opinion, I see that the big banks tries to preserve over the next years their huge profits made in 2008 and doing nothing for that profit but only hiding behind a contract and profiting the unprotected clients. When this protection finally arrived they start shouting.

IS THAT FAIR Mr. van Groningen?

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SvG November 1, 2010 at 21:35

Catalin, thank you for your comment. Again, I am not going to comment on specific Raiffeisen cases here, but I’ll try to answer you nevertheless.
The total of (administrative costs +reserve costs+ risk costs) is what needs to be covered by the fixed margin, it doesn’t represent another variable component in a credit contract. Of course we need to bring these cost down and I’ll write about this some other time. Your point is that, while Euribor dropped you had to pay more. This is explained by the fact that, while Euribor dropped, the country risk premium went up. As explained, euro lending in a non euro country is based on euro we need to borrow from abroad. For this we don’t pay Euribor, but Euribor plus country risk. This is measured in CDS (Credit Default Swap) rates, these increased with almost 6% and later came down to 3-3,5% what they are today. Contractually some banks probably could have increased rates with 6% and dropped again with 3%. Some increased with more than others. Banks can absorb part of these shocks in their balance sheets because they have a funding mix that is made up of different instruments with different maturities. On the basis of this they calculate a “base rate” of “prime rate” that is much more stable than Euribor. (Remember the situation 2 years ago, when Robor went up to 58% or whatever it was), banks didn’t pass this on. (In the future OUG 50 wouldn’t allow this anymore))
I can understand that there is a level of frustration about “old” clients paying more than “new” clients. Market circumstances have changed rather a lot. Credit demand is very low, risk appetite is low, the opposite of a few years back. Maybe the interest rates for the small number of new loans are also not “fair” in that sense that they are too low. Is it fair that the house I bought is now probably worth less than when I bought it ? Is it fair that the computer I bought dropped 20% in price 2 weeks later ?
Banking is a long term business, you cannot look at the profit of one year and come to conclusions. Each bank carries a large amount of risk on it balance sheet. Over time this risk will become visible. It will be only after the crisis that we can make a proper assessment of the profitability of individual banks.
Banks, especially the stronger ones, have nothing against consumer protection rules. It is good for more competitive banks. What banks are against is applying unclear regulations to affect existing contracts. As long as it is unclear how OUG 50 needs to be interpreted, it is also unclear if banks will face losses and how big these might be.
Besides, as the future will show, OUG 50 does not take into account that in Romania most of the lending is done in another currency that they national currency, but I have already written enough about this.

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Catalin November 1, 2010 at 22:59

Dear Mr. van Groningen,
Thank you for your diplomatic answer as expected.

I do not believe in the argument that banks try to absorbe the fluctuations leveling the interest, because the banks level the interest in the highest point and your only argument for a high interest is that the country risk premium were of 6% at some point, which I am sure it does not cover the entire increase.

However you haven’t given me a valid argument for the banks opposition regarding the OUG 50.
Your only argument that the bank’s profit projections before OUG will drop is valid only if considere that the clients can refinance their credit in better conditions (profiting the fact that they do not pay any commission for anticipated reimbursement) because in most cases the banks conserved their total interest after OUG 50. Moreover, even in this point, your argument does not sustain, because nowadays, refinancing is a better option even in the case that an anticipated reinbursment commision of 3% is applied (the pre OUG 50 conditions) and also the banks profit projections will not be sustainable.
Instead of this opposition, try to face the new economic environment and adapt to present conditions because the legislative instability, fiscal changes and crises affected all the companies in the world, not only the banks. But only the banks try to forcibly preserve their best market conditions hiding behind the semi-valid non-retroactivity argument. Adapting the interest will make your clients fidel, you will stand out of the line and establish the bases for a trully profitable projection over the next years.

Until then, the botom line of all above is best said in Romanian „Scapa cine poate (sa isi faca un credit de refinantare)!”

Best regards!

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SvG November 2, 2010 at 09:02

Catalin,
The problem is not the refinancing. OUG50 is unclear. The number with the big losses that circulate are based on the interpretation that banks would have to keep the same fixed margin but apply Euribor instead of their internal rate. Some banks are being sued about this now. That is the problem. Not all banks would be affected in the same way, that is another problem.

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Luminita November 1, 2010 at 12:36

@Lavinia

Draga Lavinia, sunt de partea ta! ce bine le zici! Ai facut vreun credit pana acum?

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Luminita November 1, 2010 at 13:05

Draga d-le van Groningen!
urmeaza o rautate….!
Deci, in ce tara traiti si de cat timp? OUG 50, care are radacini europene nu putea fi aplicata in RO fara contributia generoasa a dragilor nostri alesi (Guvern,Parlament, Presedinte) – ai naibii ce sunt ei! am citit si eu acea directiva europeana la care faceti referire si intr-adevar sunt multe chestii neconcordante, concluzia este NU SUNTEM FAIR PLAY, ok? asta vreti sa spuneti? daaaaaaaaaaaaar, am citit si punctul de vedere al ANPC, despre care nu am o parere grozava si stiti ce, argumentele lor sunt foarte bune si foarte intemeiate!!! De asemenea, am studiat si explicatiile laice pe care le-ati facut in sustinerea punctului dv de vedere, dar cifrele avansate sunt exagerat de mari, parol! un coleg comentator facea aceasta observatie si venea cu un contraargument foarte tare, Grecia! am inteles ca aveti probleme cu atragerea surselor de la clienti in vederea constituirii depozitelor pe termen lung, nu? pai, zau asa, dobanzile pe care le oferiti sunt ridicole comparativ cu cele pe care le aveti la credite! daca ati reconsidera acest lucru, poate ca v-as sustine.
In fine, am vazut emisiunea de la PRO TV unde ati participat alaturi de reprezentantul ANPC (nu am prins emisunea de la incept, e adevarat), dar am vazut finalul si m-am lamurit. Ati oferit aceleasi explicatii ca cele de pe blogul personal, care pentru mine sunt neconvingatoare. Dumneavoastra nu vreti sa intelegeti un singur lucru, in business se castiga, dar se si pierde ! Titlul emisiunii mi s-a parut grozav de sugestiv – BANCA NU PIERDE NICIODATA! O intrebare a reprezentantului ANPC a ramas suspendata si imi permit s-o reiau, pana la urma ARB are puterea sa sanctioneze bancile pentru concurenta neloiala si pentru practici abuzive? Dv ati raspuns cu “nu” in emisiune, iar ANPC a raspuns cu “da”. Pentru ca imi suntenti simpatic, eu va cred pe dumneavoastra! In aceste conditii, de ce nu permiteti ca ANPC sa preia aceasta responsabilitate? V-ar scuti de multe,multe neplaceri! Alt subiect – RETROACTIVITATEA! Ce e neclar? OUG 50 , in formula actuala a subliniat clar ca prevederile sale se vor aplica doar de la data intrarii in vigoare si nicidecum de la data cand s-au intocmit creditele aflate acum in derulare. In opinia mea e CORECT! Nu va pune nimeni sa dati banii inapoi! In plus, toate creditele sunt provizionate, hmmmmm….. o sa aveti niste probleme cu profitul si noi cu impozitul pe profit! Nu conteaza, ne sacrificam pentru binele tuturor, sumele nu sunt prea grozave, cca 300 milioane de euroi. Doar atat! Stati, sa nu uit! Am vazut pe siteul RZB ca au fost postate prevederile Ord.50, foarte bine! Dar daca vreti sa fim fair play, de ce nu ati postat si prevederile directivei europene, nr.47/2008 (sper sa nu gresesc!) atunci cand a aparut ea! de ce ARB nu a facut lobby pentru aceasta directiva? ati preferat sa intervenit la FMI , pentru ca nu aveti argumente solide, draga domnule van Groningen! In ceea ce priveste bilantul, eiiiiiiiiiii….aici intram pe teritoriul meu! atat timp cat Ord.50 nu se aplica inainte de promulgare, bilantul bancii va fi influentat pe viitor, nu in trecut! nu vreau sa transform aceasta conversatie intr-una tehnica (ma rog, contabila!), dar credeti-ma, rezultatele financiare nu vor fi influentate din punct de vedere legal, ci doar financiar!
Cam atat….doar! Va doresc mult succes si zau, nu-l mai acuzati pe profesorul de la ASE de rea intentie, omul asta chiar stie ce spune! daca era ziarist sau politician, atunci aveam dubii si eu, dar in asemenea conditii nu va faceti griji! Il cunosc personal pe acest om si va rog sa ma credeti ca sunt putini specialisti ca el in tara asta!

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SvG November 1, 2010 at 18:51

Nu am de gand sa repet ce am scris mai sus, dar cineva care explica ca, daca EURIBOR scade, profitul bancii creste nu poate fi considerat specialist.
Ca specialista, va pun urmatoarea intrebare. Daca valoarea prezenta neta unui activ bancar (sa spunem – de ce nu- un contract de credit) este afectata de o circumstanta care reduce dobanda contractuala cu, sa spunem 2%, pentru restul vietei activului, dupa standardele internationale de contabilitate (IAS 39), bilantul bancii este afectat ?

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Luminita November 27, 2010 at 17:05

Da,bilantul este afectat! Dar de ce scade dobanda contractuala,asta nu pot pricepe!pana acum a crescut,clientii au suportat toate modificarile (in cea mai mare parte,recunoasteti!) Nu va suparati,dar chiar nu inteleg. Imi lipsesc multe date si informatii aferente contabilitatii bancare si imi recunosc limitele.

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Luminita January 8, 2011 at 23:27

Buna seara Domunle van Groningen,
Doresc sa va pun o intrebare : vi se pare normala o marja de 10 % la un credit de investitii al unei societati, asa incat in acest moment EURIBOR + marja = peste 11.2 % ? Vi se pare normal ca, in conditiile actuale, cand s-a solicitat diminuarea dobanzii, sa se ofere o reducere de DOAR 0.5 % ? Este inadmisibil ceea ce se intampla in Romania : s-au acordat credite de milioane de EUR cu niste dobanzi ridicol de mici PE CRITERII POLITICE ! Iar reesalonarea acestora se face cu nerusinare fara a afecta GARANTIILE alesilor (softi si actuali)nostri. Bancile sunt suportul clasei politice ! Nu au nicio legatura cu bussines-ul adevarat ! Sume colosale cu dobanzi ridicol de mici s-au oferit si se ofer/mentin si in acest moment ! Facilitati deosebite se acorda numai anumitor persoane – pentru care platesc cei de jos ! Sa nu ne mai ascundem dupa degete si sa recunoastem ca nicio persoana publica si influenta din aceasta tara nu a ratat “facilitatile” bancilor din Romania. Nu uitati insa ca daca noi, cei mici ne prabusim, voi cei mari veti ramane doar cu marjele de pe hartie ! Si poate cu marjele de 0.5 % la creditele de milioane de EUR cu garantii ce nu mai reprezinta nimic. Dar, statul sa traiasca !

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Daniel February 10, 2011 at 10:33

We have high interest rates in Romania because the banks wants them high and because the government doesn’t know or doesn’t care to keep them low. The banks have no reason to lower the rates. What laws have banks (before and after privatization) proposed to establish an onest relationship with the client and to minimize the client risk? Like a credit history or a record of all missed payments. I would imagine that establishments with such a long history in banking would know how to handle this. Instead banks jumped when the laws interfered with their profits. ;)

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SvG April 1, 2011 at 09:43

Banks are not interested in high interest rates, they are interested in high margins. Credit history is kept at the Credit Bureau but, as I wrote here, in Romania banks are not allowed to have access to payment behavior in other industries.

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SvG November 2, 2010 at 22:30

Marian, thank you for you appreciation. It does take a lot of time to blog but I enjoy (most of) it. Debt restructuring and collection is a complicated business with many variables and some banks seem to be better at this than others. A temporary reduction of interest rate is sometimes a good solution to buy time. Another option would be to spread the loan over a longer period. I am not so sure that it is only in the interest of the banks to restructure a loan. Yes, the bank avoids creating a provision, but the client avoids defaulting on his loan.
Banks that have higher profits probably have taken better credit decisions in the past. I think that most of the time differences in provisioning have disappeared. Some banks were late in provisioning but time has caught up. We can only assess the performance of individual banks after the crisis by looking at a number of years combined.

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