Serb banks checked

BELGRADE – Serbia’s central bank said yesterday it hiked the reserve requirement for banks to 60 percent from 40 percent to respond to overheating demand, cutting back banks’ borrowing abroad and preempting surging price pressures. «Signs of economic overheating are obvious. Bank lending translates into higher demand and the National Bank of Serbia must act with even tighter monetary policy,» central bank Governor Radovan Jelasic told a news conference. He said an 11.3 percent increase in banks’ lending activity in the first quarter of the year, based on fresh borrowing abroad, and an 11.0 percent real growth in average wages – above 10.5 percent productivity increase – had fueled demand. Jelasic said a major concern was a strong jump in the private sector’s short-term borrowing, which rose by 625 million euros to reach a cumulative 5.9 billion euros in March. The new reserve requirement level – triple what it was in June 2005 when the tightening cycle was launched – will apply as of tomorrow to hard currency transactions, savings and other sight deposits as well as loans received from foreign banks that mature in a period of up to 24 months. The measures will not apply to state-guaranteed credits, including lending to the farming sector or housing loans. The central bank first wanted to slap the measure on maturities of up to three years but amended the rule in compromise with the Finance Ministry which wanted the measure to affect only maturities of up to 12 months. The central bank will also force banks to rethink retail lending policies by limiting their private sector loan volume to 200 percent of their capital, excluding subordinated loans. «Some banks will meet this requirement through capital increases, others may decide to amend the structure of their portfolios. But this measure will affect only three, maybe four banks. Other banks will not be affected because they are not even close to the 200 percent limit,» Jelasic said. Banks have until September 30 to adjust to this new rule, he said. He added that repo rates, currently at 21-24 percent, will remain unchanged. High repo rates were blamed for wooing speculative overseas demand, but Jelasic says the repo market remains the only tool to gradually boost confidence in the dinar currency. He said the central bank was sitting comfortably on 5.7 billion euros in hard currency reserves and had no plan to change the policy of allowing the dinar to appreciate. The currency has recently come under pronounced appreciation pressures stemming from surging hard currency liquidity. «The dinar appreciation in March and April has had a stabilizing effect on prices,» Jelasic said. April inflation hit 15.6 percent year-on-year after 14.4 percent in March. May will be critical with more price hikes in energy and telecoms services, and food after recent floods. The government is aiming for 9.3 percent inflation. (Reuters)