Fresh rise in bad loans worries banks

The rate of nonperforming loans continued to increase to worrying levels during the third quarter of 2010, as bank data revealed that the portion of loans whose repayment has been delayed came to 10 percent at the end of September from 9 percent at the end of July.

This marks a considerable deterioration for bank portfolios as bad loans had stood at just 7.7 percent in December 2009. NPLs added up to 26 billion euros at the end of September.

The figure is worse than expected, given that bank officials had not been anticipating a 10 percent level for bad loans until the end of the fourth quarter, rather than the third; as a result the end-December figure is expected to exceed this rate considerably, with bad loans set to soar to as high as 13 percent in 2011 and then even higher in the first few months of 2012.

This estimate relies on the optimistic plan that anticipates the beginning of an economic rebound after the first half of 2011 or toward the end of the year. However, delayed loans will continue to increase as there is a predictable time delay between the solution of a problem and the overcoming of its consequences.

The course of NPLs will also depend on the intensity and the duration of the recession. If the economy cannot find its footing in the second half of this year to bottom out, then the impact on bad loans and the banking system in general will be considerable.

What is encouraging, however, is that the number of new bad loans is declining from quarter to quarter. Bank officials told Kathimerini that the big growth in the bad loan index is not due to new NPLs but to the shrinking in the overall number of loans. ?The major drop in demand combined with cash flow problems lead to a reduction in the number of other loans, pushing the ratio higher,? bank sources explained.

They added that the rise in nonperforming loans is due to the recession and the shrinking of economic activity, but argued that the government?s legislative initiatives and the general targeting of the banking system in early 2010 had strengthened the culture of nonrepayment.