Serbia fears credit costs

BELGRADE – Serbia must take prudent control of its booming banking sector to prevent an uncontrolled hike in the cost of credit, analysts said yesterday. Blaming recent monetary tightening for a 60 percent rise in interest rates, some banks in Serbia have hiked rates on extended, euro-indexed loans to retail customers to over 20 percent, keeping the rate on mandatory deposits at 1.0 percent. To crack down on lending activity that fuels demand and feeds inflation, the central bank has raised the reserve requirement on hard currency and non-resident dinar deposits and short-term borrowing to 60 percent. Stojan Stamenkovic, chief macroeconomist at the Economics Institute think tank, said banks’ behavior was unacceptable. «No one disputes variable interest rates, but the variability must be linked to a clear quantitative criterion, such as Euribor or a domestic average weighted interest rate plus an estimated risk premium,» he told a news conference. Kori Udovicki, former central bank governor and now head of the Foundation for Economic Science Development think tank, said higher lending rates meant the client always paid a price. «For more than a year, some banks operated at a loss, offering low rates to woo customers. The rates have gone up, but the way they raise interest rates is impermissible,» she said. Analysts said the central bank and the government had to turn more radical in limiting bankers’ scope to hike rates. «A law should be changed to annul any article of credit contracts allowing banks to change interest rates for whatever reason without naming the reasons,» Stamenkovic said. The most radical approach would be for the central bank to link licensing of banks’ managers to strict prudential rules. In the short term, the central bank could force banks to keep as an interest-free deposit the amount of money they lend to customers to up to two years, he said. «But in the long-term, banks must have their natural competitor, the financial market, without which repressive central bank measures will never work,» Stamenkovic said. Despite monetary tightening, banks have continued to borrow heavily abroad to ensure liquidity for growing credit. Statistics show that much of their short-term borrowing has simply been transformed into medium- to long-term balance sheet items. Economics professor Davor Savin said banks could do as they please and high rates could not curb lending. «There is hunger for all sorts of credit and there is ample liquidity. Over the past 18 months, the central bank has drained 400 billion dinars (4.6 billion euros) in surplus liquidity at a high cost. But little has changed,» Savin said. Serbia’s 39 banks posted a 10 percent growth in assets in the first quarter of 2006, driven by an 11 percent boost in their lending activity. The sector grew 52 percent in 2005.