Exclusive interview with Governor of the National Bank of Moldova Dorin Dragutanu
Mr Governor, the latest data on the financial situation in the banking system provided by the National Bank of Moldova (BNM) show that the weight of non-performing loans is on the ups, reaching 13.5 per cent in February against 10.7 per cent in late 2011. How do you explain this evolution? Is it the result of the bank system's shift to the International Financial Reporting Standards (IFRS) or there are other reasons?
On 1 January 2012 the banking system moved to the International Financial Reporting Standards. These standards differ from the national ones. There are major differences that impact the balance sheet of the financial situation of our banks. The figures differ to a large extent. The data we had at the end of the year cannot be compared with the ones we have now. Why? Firstly, it is about the mechanism for creating a risk fund, provisions for loan losses. According to the national standards, the model of expected losses is used. According to the international standards, the model of calculating incurred losses is used. The mechanism of calculating these provisions differ. So, provisions in line with the IFRS are lower and the profit is higher.
Secondly, the national standards and the BNM regulations stipulate that if loan arrears exceed 60 days, the loan interest is no longer calculated, it is in the balance sheet, but the bank does not calculate the interest rate, and the previously calculated interest rate is taken out of the balance sheet. It is a sort of sanction for the bank. If it has non-performing loans, it does not benefit from interest profit. The IFRS says that the whole sum must be included in the balance sheet no matter whether the loan is reimbursed in 60 or 180 days, and subsequently the bank must reduce the value of the asset in the amount of the risk fund.
Therefore, from 30 December to 2 January, i.e., the first working day in 2012, the banks included in the balance sheet all the interest rates that had been taken out of the balance sheet and then provisioned.
In addition, there were loans that the banks had taken out of the balance sheet and categorized them as losses. This means that they went for full provision in line with the previous principles.
Also, before there was the request for the banks to take collateral for loans and if they did not get back the loans, the collateral was included in the assets. If it failed to sell the asset in question during 12 months, the bank could ask for a 6-month postponement. If in these 6 months it failed to sell the asset, it had to take it out of the balance sheet. So the mortgaged asset does not disappear, it is not included in the balance sheet, because the bank cannot sell it. The rule is different when it comes to the IFRS: you keep everything in the balance sheet, but you set up a risk fund. It means that you show that your assets are of poor quality if you cannot sell the collateral.
Are their any other amendments?
There are other amendments, but it was these three that made the assets, loans, the risk fund, as well as the non-performing loans increase between 31 December and 2 January. It happened because according to the previous standards you had a clean balance sheet, and now you need to include non-performing loans. The banks put them back and they impaired the quality of their portfolios. According to the national standards, the non-performing loans accounted for 10.7 per cent of the overall loans in late 2011, and in two nights, in the morning of 2 January, the figure soared to 12.9 per cent.
The international standards show that when the IFRS are applied, the quality of portfolios is a bit lower then when national standards are used.
So, is it about some simple statistical changes or about a genuine worsening of the situation in banks?
It is not about worsening. The bank has the same non-performing loans that it had before. If one has a stomach ache, it does not matter whether one wears a hat or a cap, the pain will still be there.
The international standards point up some problems. The main effect will consist in the fact that the adoption of these standards will first of all help all foreign investors understand the banks' financial situation, due to the fact that the financial reporting is carried out in line with standards that are used all over the world, including in the EU. So, they will understand the reports of our banks, or in euphemistic terms, they will be able to compare chairs with chairs and apples with apples.
So, was the shift to the international standards a positive move?
It is a phenomenal thing. It is a huge step towards transparency in the financial reports of our banks.
In addition, the IFRS impose a higher openness of the risks the banks may face. They must provide more information, which is checked by foreign auditors. The banks become more transparent and are obliged to inform about internal events.
How do you explain the fact that the last report about the financial situation of the banking system lacks some data, such as how many loans were given per sectors?
Right. But this is not so very important for the international reporting standards. For the bank system, for us as regulators and for the investors it does not matter how many loans were given to the trade sector or industry. Important is the risk to which the bank is subjected.
It has probably taken a long time to shift to the international standards?
It was a too long period of preparation, because we should have shifted to the IFRS two to three years ago. And every time people were saying that we were not ready, that we needed more time. At the end of the day, two years ago, it was decided to move to the international standards, by applying the principle "learn by doing". One cannot become a virtuoso only by watching the piano.
These standards were not an absolute novelty for the banks. There were cases when they used them, because the mother banks or their foreign partners were asking them to. The bank heads, the financial managers know very well what these standards are about, what differences there are and why; this is not an absolutely new thing. The only thing that requested considerable efforts was the adjustment of the banks' system of reporting and accountancy. I mean, they must not only report but also keep record in line with the international standards.
Now instead of two reports, there will be only one monitoring report and quarterly reports. And while shifting to the IFRS, in order not to invent the bike, we implemented a completely new system for banks to report to the National Bank, in terms of both tables and system. We have a separate channel, a separate portal. Yes, some issues may emerge in the first year, society needs to get used to the new standards. There are troubles with comparative data; therefore every report will cover the situation on 2 January so that we are able to compare with the beginning of the year at least. It is simply worthless to adjust the 2011 statistics to the international standards.
What do the data about the non-performing loans show now?
There weight has increased from 12.9 per cent to 13.5 per cent. The loans portfolio has worsened a bit. The amount of reductions went up by 400 million lei, the regulatory capital of the banks decreased. The banks already have the first signs of pressure over their portfolios.
How the international financial reporting standards will benefit the banks' clients?
Directly, in no way, unless we are talking about a very sophisticated client, who follows the banks' operations and knows what the IFRS means. In this case, the clients will understand better when analyzing the annual financial situation. The international standards have not been made for the wide public, just like the national standards. They are for the people in charge.
If we talk about the latest data of the report for February, what do they show?
We witness the first pressures that deteriorate the loans portfolio. But they are not very persistent or alarming. In 2010, we witnessed a gradual decrease in the non-performing loans, whereas at the beginning of this year we are witnessing a gradual increase in non-performing loans. There is some pressure on the quality of the portfolio. The positive thing is that now we can compare this index, the weight of the non-performing loans, with the one from Romania, the Czech Republic or other countries. Because we all speak the same language, have the same assessments.
What can you say about the banks' portfolio? Is it increasing? Is it decreasing?
If we look at efficiency, it is almost the same. Profitableness is not impaired so much because the portfolio has not deteriorated sharply, there are only the first signs. We cannot even say that it smells like smoke, we can only feel that something is happening somewhere.
The number of given loans was on the rise, the deposits are increasing more slowly than in 2011, and the interest rates will be close to a record low at the end of March. Yet, we should ascertain that the banks still have not reacted to the relaxation of the monetary policy that took place over the past three months, when we decreased the base rate from 10 per cent to 4.5 per cent.
The banks haven't, but the market of state bonds reacted quite swiftly.
Indeed, it reacted immediately after two weeks. But our target is the cost of the loans. We want to see the interest rates ion loans decreasing by at least two to three per cent. I mean, we would like to have a pondered average not of 13.9 per cent but of 12 per cent, for instance, or even less. We have to wait. There was no way for our decisions to have some impact in January and February. In this period, fewer loans are given and it was then that we took the decisions, whereas March is traditionally an active month for crediting, the demand is very high and the banks have managed to oppose the pressure of decreasing the interest rates, because, I repeat, the demand was high. We shall see what they will do in April and May. I believe that the banks will have to decrease the interest rates at some point, because otherwise they will report much worse results than in 2011, and I do not know whether their shareholders now understand that if the banks fail to adapt to the new monetary conditions, then their profit will be much lower than the year before. The shareholders should ask the bank leadership how they plan to react, because they receive less money from the interest rates on state bonds and certificates of the National Bank, by 250-280 million lei less, because the interest rate has decreased. This is about one third of the profit of the bank system in 2011. I am sure that the business plans for 2012 do not see a one-third decrease in their profit. I believe that the shareholders will ask the bank leadership: well, I understand that you will not receive money for the state bonds and BNM certificates because the interest rates have decreased, but how do you cover, aren't you supposed to give more loans so that you are able to generate a higher interest rate? The bank's leadership can say that there is no demand. But as it happens on the market, you decrease the price if there is no demand for the goods. The same for loans. Therefore, I think they will not wait too long. The more so as they are also under pressure from the clients who see what the national bank is doing. I said that the inflation rate will decrease swiftly and it is decreasing swiftly.