As of December 2015, non-performing loans (NPLs) amounted to €6.5 billion, equivalent to a NPL ratio of 13.6% and a NPL coverage ratio of 57.4%.
In 2014-2015, Romania made significant progress in enhancing oversight of NPLs within the banking sector and addressed some of the main impediments to NPL resolution and transactions (see EBRD’s note: What lessons from Romania’s early success in NPL reduction?). As a result, the NPL ratio for non-financial corporations declined by 6.4 percentage points in the year to June 2015 (based on IMF data). Romania also accounted for three quarters of NPL transactions observed during H2 2015 in the CESEE (see the Regional NPL Monitor).
Corporate debt is still pervasive in Romania’s corporate sector. A EBRD Working Paper finds that more than one third of firms is burdened by leverage in excess of four times EBITDA. At the same time, this excess debt is relatively widely distributed across the corporate sector, and the measure of debt concentration is lowest among the six CESEE economies studied. In line with the CESEE average, about 30 percent of firms are characterized by poor performance in terms of revenue growth rate and return to capital.
Highlights on NPLs (click to enlarge)
Assessment of NPL Burden and Corporate Debt Distress
National Bank of Romania, Financial Stability Report, September 2015
The portfolio of bank loans to non-financial corporations improved in terms of quality in December 2013 – June 2015. This evolution was mainly determined by the stronger balance sheet clean-up, following the NBR’s recommendations to credit institutions with a view to ensuring the conditions for sustainably resuming lending. There is still significant room for cleaning up bank balance sheets, considering that approximately 80% of NPLs report payments overdue by more than one year and the migration rate of NPLs to lower risk -buckets is very low.
By borrower size, micro-enterprises are the riskiest firms in banks’ portfolio, ahead of small-sized companies. In both cases, the NPL ratio fell markedly (by more than 6% in June 2015 compared to December 2013). At the opposite pole are large companies, with a NPL ratio of 6.2%, slightly up compared with December 2013 (+0.2%). By business sector, companies in construction and real estate continue to pose the largest credit risk, with their NPL ratio reporting the highest level (23.9%, in June 2015), albeit on a significant decrease versus December 2013 (from 29.2%). The lowest NPL ratio was recorded by companies in services and utilities (12.7% in June 2015), followed by firms in industry (which are expected to contribute to the sustainable change in the economic growth pattern), i.e. 16.4%.
International Monetary Fund, Romania: Concluding Statement of the 2015 Article IV Mission, 9 February 2015
The banking sector continues to maintain adequate capital, liquidity and provisioning buffers, and asset quality has improved. Following a comprehensive NBR action plan and EU-wide methodological changes, NPLs declined in 2014 by about 8 percentage points but bank balance sheet repair is still incomplete. Measures included NPLs sales, write-offs and higher provisioning. Given the high but falling share of FX-denominated loans (56%), indirect FX risk remains the largest risk for the sector. However, pressure from the Swiss franc appreciation is manageable for the banking system, since the share of Swiss franc loans is relatively low at about 4.5% of total loans across about 75,000 borrowers. Staff encouraged voluntary bilateral loan restructurings taking into account the repayment capacity of the borrower.
European Commission, Country Report Romania 2016, February 2016
The implementation of the 2014 plan of the National Bank of Romania on the resolution of NPLs resulted into a significant decline in the NPLs ratio at system level. The cleaning up of bank balance sheets was primarily done through the write-off of fully or partially provisioned unrecoverable loans. In addition, in 2014 and 2015, the Romanian market was one of the most buoyant markets in central and Eastern Europe for sales of impaired assets.
In 2015, the National Bank of Romania decided to perform a comprehensive asset quality review and stress test of the Romanian banking sector. A transparent approach to the evaluation of assets of credit institutions will dissipate potential uncertainties regarding the fair value of assets, thereby accelerating the cleaning-up of bank balance sheets.
European Investment Bank, CESSE Bank Lending Survey H1-2016, July 2016
Perfectly in line with hard data and the CESEE aggregate, NPL ratios are reported to have improved over H1 2016 in both the corporate and retail sectors in Romania . Moreover, on balance, NPLs are expected to keep decreasing over the next six months, although at somewhat lower pace. While domestic factors played a very moderate positive role in determining supply conditions in H1 2016, international factors put, overall, some damper on them. See full text
National reforms and support by the international organisations
Highlights of significant measures implemented recently
Progress with NPLs write-off: NBR encouraged banks to write-off or sell non-collateralized, fully-provisioned, NPLs past due for over one year or delinquent loans undergoing legal (insolvency or bankruptcy) proceedings. This resulted in NPLs ratio decline by 5.7 percentage points (12-2013 to 06- 2015).
Corporate Insolvency Law: A new corporate insolvency law has recently been adopted to replace the one in force since 2006. Experience with its implementation is currently limited.
Personal Insolvency Law: The personal insolvency law was adopted in mid-2015 and will enter into force towards the end of 2016. The rationale for the delay is to build up the necessary institutional capacity.
Examples of measures for 2016 include:
Centralised data on collateral valuations, to decrease the opacity of information for collateral valuations and transaction prices.
Repeal of buyer licensing requirement for acquisition of NPLs under Law 190.
The authorities, regulator and the EBRD need to work with Romanian lenders and their parent companies to encourage off-loading to the market, especially given increased interest from specialised distressed asset investors.
The insolvency legislation is on the whole well-balanced and offers a number of useful tools to debtors and creditors. However, further work should be done in strengthening Romania’s out-of-court restructuring culture and the promotion of restructuring guidelines and codes of conduct among banks. Although a set of “Bucharest Rules” (based on the INSOL Principles for multi-creditor workouts) has been developed, banks and their advisors report that it is not used in practice. NPLs, especially in the corporate sector, remain a material issue for Romanian banks.
The current focus of the EBRD-supported Vienna Initiative is on NPL resolution. Consideration is being given to including Romania with a number of other countries with high NPL levels for focused attention by the EBRD and other organisations as part of the Vienna Initiative. Amongst other measures, EBRD’s is committed to help clean up NPLs from balance sheets by selectively financing reputable collection companies and directly investing in portfolios across asset classes in cooperation with distressed asset investors. Policy dialogue will also focus on continuing NPL resolution and managing an orderly deleveraging process.
IMF, Romania: 2015 Article IV Consultation—Staff Report; Press Release; and statement by the Executive Director for Romania, 27 March 2016
Romania is in the process of modernizing its insolvency regime but not all elements are yet in place to ensure its efficacy. The new Corporate Insolvency Law has only recently been adopted and experience with its implementation is limited. The authorities are currently drafting a personal insolvency law. Several design issues need to be carefully considered and before adopting the law, the authorities should conduct an impact assessment and broad stakeholder consultations, ensure consistency with the corporate insolvency law, and strengthen the institutional framework to support effective implementation of the law. This is critical in ensuring that the personal insolvency law successfully provides those with unsustainable debt a fresh start without endangering the payment culture.
Key policy responses to the imbalances and adjustment issues for the Romanian Financial Sector:
The National Bank of Romania (NBR) launched a comprehensive asset quality review and stress test with third-party involvement of the banking sector in May 2015. The review is on-going.
The NBR has stepped up efforts to maintain an adequate management of liquidity in the domestic banking sector, extending the list of available instruments and eligible collateral for open market operations.
Recent legislative initiatives, in particular the law on debt discharge in its current form, may generate a systemic risk and pose a challenge to financial stability. Other sources of vulnerabilities are the implementation of the law on abusive clauses and legislative initiatives on the conversion of foreign currency loans into local currency loans.
What lessons from Romania’s early success in NPL reduction?
Fernando Montes-Negret and Eric Cloutier (EBRD advisers) review the successful phase of NPL reduction in Romonia. Between end-2013 and mid-2015 the NPL ratio for non-financial corporations declined by 5.7 percentage points and the most dynamic flow of new transactions in distressed loan portfolios in emerging Europe developed during this period. There are still obstacles in the market and transparency of asset valuation needs to be further enhanced. A more challenging phase in the NPL resolution process now lies ahead, which will require a different set of skills from banks. Enhancing the process for out-of-court restructuring of viable but distressed borrowers must be a priority for both regulators and banks. Regulatory stability and investor confidence will be needed to sustain market-based solutions, and new types of market participants, such as specialised corporate turnaround teams, will be need to enter