Loans and economic growth – how to conquer the risks

Published: 5/4/2016

Recovery and more optimistic expectations stimulate demand, but debt overhang and the lack of collaterals weigh on the recovery of demand for loans, said Boris Vujčić, the Governor of the Croatian National Bank, at the conference Loans and economic growth – how to conquer the risks? organised by the Croatian Banking Association (CBA) and the Croatian Employers' Association (CEA).

Croatia did not experience the credit crunch during the crisis, thanks to CNB's measures, the Governor emphasised. Corporate lending was growing, as were the foreign sources of financing. However, despite the growth in lending, the Croatian GDP declined. Banks still demonstrate risk aversion, he continued, although lending conditions are being mitigated and interest rates are decreasing, while their further decline is limited by the country's credit rating.

The Croatian corporate sector is among the most leveraged in Central and Eastern Europe, i.e. about a third of corporate debt is excessive, Governor Vujčić explained, adding that the main obstacle to getting loans is the lack of collateral of corporations without debt overhang, i.e. primarily small and medium-sized enterprises. Other sources of financing, such as equity funds or international financial institutions, must also play a role in corporate financing.  Governor Vujčić also mentioned the possibility of using guarantee schemes, which would offset the lack of collateral.

Rather than considering the growth of lending as the key factor or the formula for the ultimate recovery of the Croatian economy, instead, it should be the growth of exports and increase in competitiveness of the domestic economy, Governor Vujčić emphasised.  What the Croatian National Bank can do, he concluded, is to continue ensuring the high liquidity of the banking system, while taking into account the stability of the exchange rate of the domestic currency and overall financial stability of the system.

Participants at the gathering held on 5 April 2016 under the auspices of President of the Republic of Croatia Kolinda Grabar-Kitarović included numerous entrepreneurs, representatives of the Government and the Parliament of the Republic of Croatia, representatives of foreign embassies in Croatia, domestic and international financial institutions and economic and financial experts and analysts.

After the opening speeches by Zdenko Adrović, CBA's Director, and Gordana Deranja, CEA's President, and the speech by Minister of Finance Zdravko Marić, Dubravko Mihaljek, Head of Microeconomic Analyses at the Bank for International Settlements (BIS), gave an overview of the results of international surveys, which show that banks actually tighten their credit policies during the crisis. Velimir Šonje of Arhivanalitika underscored the problem of the high level of corporate sector debt and presented the analysis of the relationship between corporate loans and industrial production, which shows that in the long run there is no growth without loans.

Participants in the interesting panel discussion that followed included Gordana Deranja, CEA's President, Zdravko Marić, Minister of Finance, Carlos Piñerúa, World Bank Country Manager for Croatia and Slovenia, Božo Prka, President of the Management Board of Privredna banka Zagreb, Petar Šimić, CEA's Vice-President – SMEs Association, Emil Tedeschi, President and Chief Executive Officer of Atlantic Grupa and Miljenko Živaljić, President of the Management Board of Zagrebačka banka.