As of December 2015, non-performing loans (“NPLs”) amounted to €5.9 billion, for a NPL ratio of 16.3% and a NPL coverage ratio of 61.9%. As of June 2015, corporates (excluding government) made up 67% of the NPL stock while household NPLs were 31% of the gross NPLs. The rest of the NPLs were other sectors.
A new bankruptcy law was adopted in June 2015 aimed at shortening the bankruptcy procedures and strengthening creditors’ control over the process. The government also introduced personal bankruptcy for citizens and entrepreneurs who are unable to meet liabilities for three consecutive months.
The World Bank and the EBRD are closely involved in supporting the authorities under the Vienna Initiative framework, seeking to identify and support overcoming obstacles in the prudential, accounting, tax, and legal framework. A first workshop on out-of-court restructuring is planned for October 2016.
According to a forthcoming study, in 2014, 17% of firms were extremely leveraged with a leverage ratio exceeding 10. These companies accounted for more than 40% of overall corporate net debt and for almost two-thirds of overall excessive corporate debt. About 30% of firms are performing poorly in terms of revenue growth and return on capital, indicating weak prospects to grow out of debt.
Assessment of NPL Burden and Corporate Debt Distress
National Bank of Croatia, Financial Stability Report, July 2015,
As a result of the growth in loans to the government, as well as the end of the rise in non-performing corporate loans, the NPL ratio has held steady from September 2014. The rise in NPLs slowed down after September 2014 and followed the rise in total loans, so that the NPL ratio held steady. This was mostly influenced by the growth in the share of loans to government units in total loans, which increased total loans, while the amount of NPLs remained stable. The amount of non-performing corporate loans ceased to grow so that the increase in loans to this sector triggered the fall in the NPL ratio in early 2015. By contrast, non-performing household loans steadily increased, as did their share in total loans.
The coverage of NPLs continued to grow due to ageing of existing NPLs and the application of amended rules on loan classification (after 2013). As with the quality of the credit portfolio, the largest impact on the increase in the coverage of NPLs continued to be made by the corporate sector, where the NPL coverage has been steadily growing since the end of 2010. At the same time, differences across banks with regard to the quality of credit portfolios increased steadily, and were primarily a result of differences in portfolio structure and the inability of some banks to diversify their credit portfolios.
IMF, Republic of Croatia, Country Report No. 15/163, 2015 Article IV Consultation – Press Release, Staff Report and Statement by the executive director for the Republic of Croatia,
While NPLs are high, banks’ large capital buffers and provisions contain risks to financial stability. Some pockets of vulnerability in smaller banks are addressed in the context of standard supervisory operations. Still, IMF staff argued in its recent visit to the country—and the authorities agreed—that clearing out NPLs at a faster pace was desirable, not least to allow borrowers a fresh start.
National Bank of Croatia, Financial Stability Report, July 2015,
The international comparison of the World Bank indicates that efficiency in the resolution of the issue of NPLs in Croatia is lower than elsewhere in Central and Eastern Europe (CEE); Croatia lags behind with regard to the recovery rate, while the strength of its legal framework is average. Although Croatia received the average score with regard to the cost and time of insolvency proceedings, its debt recovery rate received a below-average score due to the fact that insolvency proceedings are mostly commenced in relation to enterprises that discontinue operations. By contrast, Croatia was ranked as an average Central and Eastern European country with regard to the strength of its legal framework. However, although this publication provides a comparison of practices in the Republic of Croatia and similar countries, its results should be interpreted with caution as they are based on estimates, while the practical implementation of the regulations assessed may be different.
European Commission, Commission Country Report Croatia 2016,
With the run-up to the parliamentary elections, the reform agenda has suffered from delays, resulting in limited progress in addressing the 2015 country-specific recommendations. During the past year, Croatia has undertaken some reforms aimed at reducing the administrative burden on businesses and removing parafiscal charges. New and revised legislation in the field of personal and corporate insolvency is expected to speed up the deleveraging process and support the resolution of NPLs. Private Sector debt is at a high level and is not declining and the high stock of NPLs remains a challenge for the financial sector. Low profitability in the construction sector due to stalled sales is detrimental as this sector is one of the most important drivers of NPLs in the economy. So far, Croatia has experienced rather limited deleveraging and private debt has remained at high levels. High corporate debt is concentrated in sectors with low profitability and is reflected in the deterioration of banks’ portfolio. Furthermore, the capacity of the banking sector to support the recovery may be constrained by the impact of the legislation adopted in September 2015 which allows for the conversion of household CHF loans to EUR, as it implies losses for the banks. Finally, domestic borrowers remain exposed to currency risk, in turn implying high exposure of the financial sector to currency-induced credit risk. The current tax regulation related to NPLs write-offs allows for tax deductions but leaves room for interpretation, entailing legal risks for banks.
European Investment Bank, CESEE Bank Lending Survey, H1 2016
After many periods of continuing deterioration, banks have indicated a positive shift in corporate NPLs, and expect improvements in the household segment, too. Aggregate NPL ratios have been described on a decreasing path over H1 2016. Although NPLs in the retail segment still rose over H1 2016, significant improvements have been detected in the corporate segment. Furthermore, most subsidiaries believe now that in both segments NPLs will decrease in H2 2016.
Domestic factors had a neutral effect on credit supply in Croatia. Among the international factors, the outlook for parent groups, group funding and the evolution of group-level NPLs have been contributing positively, while the global market outlook has been a drag on credit supply.
National reforms and support by the international organisations
Highlights of significant measures implemented recently
New Bankruptcy Law: Adopted in June 2015, aiming to shorten the notoriously long bankruptcy procedures and strengthen creditors’ control over the process. The new legislation enforces these procedures within eight days if a company’s bank accounts are blocked for more than 120 days. It speeds up the transition from pre-bankruptcy to bankruptcy. The government also introduced personal bankruptcy for citizens and entrepreneurs who are unable to meet liabilities for three consecutive months.
Consumer Bankruptcy Act: Also in progress and should be enacted in 2016.
EBRD, Country Assessment: Croatia, Transition Report 2015,
Tackling high NPLs and corporate restructuring should be high on the agenda in order to revive credit and economic growth. NPL levels (especially for corporates) are high and NPL resolution is progressing slowly, limiting the range of creditworthy borrowers and constraining bank resources for new lending.
Deleveraging and the rising levels of NPLs continue to restrict credit growth. While capital adequacy ratios provide strong shock-absorbing capacity to the banking system, the high level of NPLs and weak economic prospects have kept credit growth negative since mid-2012. Over the past two years the central bank has introduced certain measures to address the problem, including changes in provisioning, treatment of restructured loans, compulsory minimum haircuts and collection periods for real estate and moveable property. These steps are yielding some results as NPL growth has slowed since the end of 2014, but consistent efforts to remove remaining tax, legal and regulatory obstacles are still needed to create a well-functioning market for NPLs and support faster resolution.
In term of major structural reform developments, a new bankruptcy law was adopted in June 2015, aiming to shorten the notoriously long bankruptcy procedures and strengthen creditors’ control over the process. The new legislation enforces these procedures within eight days if a company’s bank accounts are blocked for more than 120 days. It speeds up the transition from pre-bankruptcy to bankruptcy. The government also introduced personal bankruptcy for citizens and entrepreneurs who are unable to meet liabilities for three consecutive months.
EBRD workshop in Zagreb on corporate out-of-court restructuring of NPLs, November 2016
On 22 November 2016, the European Bank for Reconstruction (EBRD) hosted a workshop in Zagreb under the Vienna Initiative on out-of-court restructuring. The workshop aimed to identify ways of strengthening the cooperation of banks with regard to non-performing loans (NPLs). The event was an occasion for the Croatian Ministry of Justice to present its non-binding “Guidelines on Corporate Debt Restructuring by Means of Out-of-Court Agreement” introduced in October 2015. On that basis, participants discussed the Guidelines and offered solutions which encourage banks to adopt a more cooperative and coordinated approach to multi-creditor (not just bilateral) cases.