Why credit expansion stalled

Detailed report by the State Audit Council explains the reasons for banks’ reluctance to lend

Why credit expansion stalled

There are three main reasons for the limited funding of the real economy by banks, the State Audit Council wrote in a report released on Monday: They are nonperforming loans, deferred tax credits and the easing of the payment culture due to delays in the liquidation of bad-loan collateral.

The report – titled “Bank Financing of the Real Economy: Has the State’s Fiscal Intervention Contributed to the Restoration of Credit Normalcy?” – was conducted in response to a request by the Parliamentary Committee for Institutions and Transparency.

It concluded that “the return to credit normalcy, which will signal the regular financing of the real economy by banks, requires the relief of banks’ finances from NPLs, the correction of any distortions in banks’ behavior from the deferred tax assets that also burden their financial report, the regular continuation of the liquidation process in a socially acceptable fashion and the ending of the emergency measures and conditions due to the pandemic that broadly generate insecurity.”

In its report the State Audit Council cites the measures the state has taken to ensure credit stability, mainly through the Hellenic Financial Stability Fund.

The report refers extensively to the Bank of Greece proposal about tackling the problem of bad loans in parallel with the deferred tax credits, the so-called Argo plan. The council argues that “if the plan maintains its timely character, it should be the subject of public discourse.”

The main reason why banks appear reluctant to indulge in credit expansion, the report points out, is the uncertainty on the course and level of NPLs, which despite the adjustment implemented have remained far above the equivalent rate of other European lenders.

Besides the issue of deferred tax credits, which forces banks to invest any profits instead of lending, the credit sector appears unable to tell the strategic defaulters from those genuinely unable to meet their loan obligations. That also renders banks more reluctant in the risk assessment process.

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