Currency and

Credit
Course 3
Contents
Chapter 3. Fundamentals of
credit activity

3.1. Basic concepts

3.2. Types of credit
3.3. The Romanian legal framework
related to credit activity

3/19/17 2
 3.1. Basic concepts
CREDIT = The word credit comes from the Latin "creditum-creditare",
which means "to trust". This points out a physiological factor of the credit
activity which is the trust.

The credit as trust main

Loan / credit means element TRUST
immediate possession of
resources in exchange of
a future payment The credit as an expression of
promised involving also redistribution relationships;
an interest payment, passive capital active capital
that rewards the lender The credit as a form of exchange
relationships; goods and services
transferred in exchange for the
promise of refund in the future.
What is the role of credit in economy?
Do you think there is the relationship
between economic growth 3/19/17
and credit ? 3
The elements and features of
credit

3/19/17 4
 The parties of the credit relation,
the creditor and the debtor, are
called in the literature "the subjects of
the credit relation". The creditors and
the debtors can be grouped into three
major categories: the population, the
state and the economic agents.

The promise of repayment

represents the creditor's commitment
to repay, at the maturity date, the
amount of the borrowed capital, plus
the interest, as price of the credit.
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The security/guarantee of the credits represents a characteristic
related to their repayment.

3/19/17 6
 The maturity date or the repayment term
provided in the contract differs according to the
features of the field of activity and the efficiency
level of the credit beneficiaries' activity.
Thus, there is a variety of maturity dates, from 24
hours (in the case of interbank market) to
medium and long periods (20 or 30 years) in the
case of mortgage loans.

The interest represents a characteristic of the

credit and it is the price of the used capital or the
"rent" that the debtor pays for the right conceded
to him, that of using the borrowed capital. The
quantification of the interest is acquired by using
the interest rate which becomes a tool for
influencing the demand and the supply of credits.

3/19/17 7
 Interest Rate
The borrower offers this price (interest rate) because:

he hopes to be able, after paying it, to benefit himself out

of what he is going to make with its help;

a Government hopes to improve the country's wealth by its

use;

Sometimes borrowers want money because they have been

spending more than they have been getting, and try to tide
over a difficulty by paying one set of creditors with the
help of another, instead of cutting down their spending.
This path could leads to bankruptcy for the borrower and
loss to the lender.
 Interest rate main elements
The interest is a fee, paid on borrowed capital. The
interest is calculated upon the value of the assets.
The amount lent, or the value of the assets lent, is called
the principal. This principal value is held by the
borrower on credit. Interest is therefore the price of
credit, not the price of money as it is commonly - and
mistakenly - believed to be.
The percentage of the principal that is paid as a fee (the
interest), over a certain period of time, is called the
interest rate.
The fee is also a compensation to the lender for foregoing
other useful investments that could have been made with
the loaned money. These foregone investments are
known as the opportunity cost.
 Interest rate - calculation
Interestrate is a rate which is charged or paid
for the use of money. An interest rate is often
expressed as an annual percentage of the
principal. It is calculated by dividing the
amount of interest by the amount of principal.

Forexample, if a lender (such as a bank)

charges a customer $90 in a year on a loan of
$1000, then the interest rate would be:

90/1000 = 9%.
 Interest rate - calculation
Interest
ratesare typicallynoted on an annual
basis, known as the annual percentage rate
(APR).

The assets borrowed could include, cash,

consumer goods,large assets, such as a vehicle
or building.

Interestis essentially a rental, or leasingcharge

to the borrower, for the asset's use.
There are two main types of interest rate:
Simple;
Compound.
 a) Simple interest rate
The simple interest rate is calculatedonthe
original principal only.

Simple interest pays a fixed amount over time.

Accumulated interest from prior periods is not

used in calculations for the following periods.

Simple interest is normally used for a single

period of less than a year, such as 30 or 60 days
and it is calculated as follows:
Is = p x i x n
where:
Is - simple interest;
p - principal (original amount borrowed or loaned);
i - interest rate for one period;
n - number of periods.
Simple interest is useful when:

- The interest earnings create

something that cannot grow more.
Its like the corporate bond paying
money that cannot be reinvested;

- The investor wants simple,

predictable, non-exponential
results.

In practice, simple interest is fairly

rare because most types of
 Example - simple interest rate

Example 1: For a loan of $100 for 3 years at 50% interest rate, the
simple interest will be:
Is = p x i x n = 100 x 0.5 x 3 = 150 $

Example 2: For a loan of $100 for 60 days at 50% simple interest

rate per year (assume a 365 day year) will be:
Is = p x i x n = 100 x 0.5 x (60/365) = 8.22 $
 b) Compound interest rate

Compound interest is calculated each period on

the original principaland allinterest accumulated
during past periods.

The interest earned in each periodis added to the

principal of the previous period to become the
principal for the next period.

Ingeneral, there will be (1+i) times more amounts

each year. After n years, this becomes:

Ic = p (1+ i)n
 Compound growth is useful when:

- interest can be reinvested, which is the case

for most savings accounts;

- it can be predicted a future value based on a

growth trend.

The power of compounding can have a

great effect on the accumulation of
wealth.
 Example - compound interest rate

Example: For a loan of 100$, for 3 years and at 50% interest rate:

at first year: Ic1 = 100 (1 +0.5) = 150 $

in the second year: Ic2 = 100 (1+0.5)2 = 225$
in the third year: Ic3 = 100 (1+0.5)3 = 337.5 $
 Compound interest rate
If the compounding periods are yearly,
semiannually, quarterly or continuous, the principal
and the interest rate will be:

Ic = p(1 + i/t) nt

where:
Ic = principal and interest rate;
p = initial deposit;
i = interest rate;
t = number of times per year interest is
compounded;
n = number of years invested.
 Compound interest rate -
example
t Ic
The following table shows
1 (yearly) $ 10600.00
the final principal (Ic), after
n = 1 year, of an account 2 (semi- $ 10609.00
initially p = $10000, at 6% anually)
interest rate (i) at the given 4 (quarterly) $ 10613.64
compounding (t): 12 (monthly) $ 10616.78
Ic = p(1 + 52 (weekly) $ 10618.00
i/t) nt 365 (daily) $ 10618.31
 Applications solutions (1)

1. John Smith made a deposit at a bank of 2,500 USD, for 4 years

with a compound interest rate of 15%. How many money would
have lost John at the end of the 4 years if his deposit had the
simple interest rate?
For the loan of $2,500 for 4 years at 15% interest rate, the simple
interest: Is = p x i x n = 2,500 x 0.15 x 4 = 1500 $

For the loan of $2,500 for 4 years at 15% interest rate, the compound
interest: Ic = 2,500 x(1+0.15)4 = 4372,5 $

2. What will be the interest rate for a loan of 12,500 USD for 30 days
at 50% simple interest rate per year ?
For a loan of $12,500 for 30 days at 50% simple interest rate per year:

Is = p x i x n = 12,500 x 0.5 x (30/365) = 513,7 $

 Applications solutions (2)

3. Made the comparison (principal plus interest rate)

for using the simple and compound interest rate for
one investment of 20,000 USD during a period of 10
years using 17% interest.

For the loan of $20,000 for 10 years at 17% interest rate,

the simple interest:
Is = p x i x n = 20,000 x 0.17 x 10 = 34,000 $

For the loan of $20,000 for 10 years at 17% interest rate,

the compound interest:
Ic = 20,000 x(1+0.17)10 = 20,000 x 4,806828 =
96,136.56 $
 Applications solutions (3)

4. What is the compound interest rate for a loan of 5000

USD, for 2 years, using a 20% interest rate compounded
yearly, semi-annually and quarterly?

For the loan p = 5,000 $, after n = 2 year, at 20% interest rate

(i) at the given compounding (t=1), the compound interest:

Ic = p(1 + i/t) nt = 5,000(1+0,2)2 =7,200$

For the loan p = 5,000 $, after n = 2 year, at 20% interest rate

(i) at the given compounding (t=2), the compound interest:

Ic = p(1 + i/t) nt = 5,000(1+0,2/2)4 = 7,320$

For
the loan p = 5,000 $, after n = 2 year, at 20% interest rate (i) at the given
compounding (t=4), the compound interest:

Ic = p(1 + i/t) nt = 5,000(1+0,2/4)8 = 7,387.28$

 Real and nominal interest rates

Infinance, an individual who lends money

for repayment at a later point in time
expects to be compensated for the time
value of money, and to be compensated
for the risks of having less purchasing
power when the loan is repaid.

These risks are:

systematic risks;
regulatory risks;
inflation risks.
 Risks
Systematic risks which includes the possibility that the
borrower will be unable to pay on the originally agreed terms,
or that collateral backing the loan will prove to be less
valuable than estimated.
Regulatory risks which includes taxation and changes in the
law which would prevent the lender from collecting on a loan
or having to pay more in taxes on the amount repaid than
originally estimated.
Inflation risks takes into account that the money repaid may
not have as much buying power from the perspective of the
lender as the money originally lent, that is inflation, and may
include fluctuations in the value of the currencies involved.
 Nominal real interest rate
Nominal interest rates include all three risk
factors, plus the time value of the money itself.
Real interest rates include only the
systematic and regulatory risks and are meant
to measure the time value of money.
Therefore the difference between the nominal
interest rate and the real interest rate is
given by the inflation rate.
In finance and economics, nominal interest
rate refers to the rate of interest before
adjustment for inflation.
 Real interest rate
The real interest rate is the interest rate adjusted for
expected changes in the price levels so that it more
accurately reflects the true cost of borrowing. So, the
real interest rate includes compensation for the lender's
lost value due to inflation.
The real interest rate is defined by the Fisher equation
which states that the nominal interest rate (i) equals the
real interest rate (r) plus the expected rate of inflation
():
i=r+
Rearranging terms, the real interest rate equals the
nominal interest rate minus the expected inflation rate:
Example: For a one-year simple loan
with a 10% nominal interest rate (i)
and an expected inflation rate of 6%
over the course of the year, the real
interest rate will be:

r=i
r = 10% - 6% = 4%
 The lender is anxious to make a loan in
the case of increasing inflation rate,
because in terms of real goods and
services, he will actually earn a lower
interest rate.
On the other hand, the borrower fares
quite well because at the end of the
year, the amount paid back will be less
in terms of goods and services.
Therefore, when the real interest rate is
low, there are greater incentives to
borrow and less to lend.
The distinction between real and
nominal interest rates is important
because the real interest rate,
which reflects the real cost of
borrowing, is likely to be a better
indicator of the incentives to
borrow and lend.

It appears to be a better guide to

how people will be affected by what
is happening in credit markets.
The real interest rate is used in various
economic theories to explain such
phenomena as the business cycle, capital
flight and economic bubbles.

when the real rate of interest is high, that is

demand for credit is high, then money will, all
other things being equal, move from
consumption to savings;

conversely, when the real rate of interest is

low, demand will move from savings, to
investment and consumption.
A low level of the interest rate implies a
big demand for credits which determines
favorable effects on the production and
the economy, as well as a high cost of
credits, a high interest rate respectively,
generates the diminution of the demand
for credits.

Taking into account the inflation rate, in

comparison with the interest rate provided
in the credit contract, leads to
ascertaining the fact that in the periods
with a high inflation, the credits are a
perfect financing method for the debtors.
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Fixed interest rate versus floating
interest rate
According to the same element, the inflation, the
credit relations use two types of interest: fixed and
floating.

The fixed interest is provided in the credit

contract and it is valid for the entire period of the
credit.
The floating interest is modified periodically
according to the inflationary pressures and the
evolution of the interest level on the market.

The interest rates are usually linked to ROBOR/

EURIBOR/ LIBOR.

3/19/17 32
 Interbank interest rates
EURIBOR is short for Euro Interbank Offered Rate. The Euribor
rates are based on the average interest rates at which a large
panel of European banks borrow funds from one another. There
are different maturities, ranging from one week to one year.
The Euribor rates are considered to be the most important
reference rates in the European money market.

LIBOR is the average interbank interest rate at which a

selection of banks on the London money market are prepared
to lend to one another. LIBOR is watched closely by both
professionals and private individuals because the LIBOR
interest rate is used as a base rate (benchmark) by banks and
other financial institutions. Rises and falls in the LIBOR interest
rates can therefore have consequences for the interest rates
on all sorts of banking products such as savings accounts,
mortgages and loans.

ROBOR (Romanian Interbank Offered Rate) is the average

interest rate for RON-denominated
3/19/17 loans in the interbank33
3.2. Types of credit

There are various

types of credit. What
types of credit do you
know?

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 Commercial credit The borrowing is done in the form of
According merchandise (the goods and services are paid at a later date and
to the not in the moment of the sale);
economic Banking credit is related to the amount of funds that an
nature and individual or a business may be able to borrow from one or more
the parties lending institutions (Advances in current account or treasury
of the credits , credit lines in order to cover current needs);
crediting Consumer credit - is a credit offered to natural
relation persons/individuals who work based on a working contract and
have the salary as a main income source;

Bond credit - the selling of bonds by the state or companies to

banks or other legal persons in order to obtain additional capital,
in exchange of an interest;

Mortgage credit - is made based on a building/fixed asset

guaranty.

Credit granted to natural persons this form of credit is granted

According to
to individuals;
the debtor's
position Credit granted to legal persons This form of credit is granted to
companies;
Loans granted to natural
persons

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 Personal loans
Personal loans, as a type of loans offered to individuals (natural
persons) can have the following forms:
Fixed rate loans - generally used to provide financing for purchases for
covering temporary gaps in cash flows. They are made on short term (6
months-3 years) and can be secured or not; the payments are generally
done monthly.
Budget accounts provide personal customers with the means of spreading
their household and other regular expenses through the year. The customer
makes a regular monthly payment into a budget account (one twelfth of the
agreed estimated annual expenses) and draws on that account to settled
specified bills.
Mortgage loans - loans secured by means of a legal charge over a
property
Bridging loans are short term loans that provide a customer with funds to
purchase a new home while the sale proceeds of their former home are
awaited.
Credit cards - provide a revolving credit facility, up to a predetermined
maximum, and a period of interest-free credit if the balance on the
statement is paid off in full within a stated period.

3/19/17 37
Loans granted to legal
persons

3/19/17 38
 Loans granted to legal persons
Factoring - is a method of financing where a bank or other specialized
company purchases a company's trade receivables. The consideration
for this receivables acquisition may be immediate or deferred for a fixed
period of time. The amount paid for the debts depends on the additional
services offered, which may include: protection against bad debts (non-
recourse factoring - the factoring bank bears the risk of loss if the
debtor is unable to pay and therefore takes a greater discount on
the face value of the invoice); receivables collection; invoices &
collections administration.

Warehousing financing facilitates inventory lending by providing

controls on the disposition of a borrower's inventories. An independent
third party receives and stores the inventories and provides the bank with
warehouse receipts. The bank then creates a deposit for the borrower at
an advance rate, typically in the range of 50 to 80 % of the value of the
receipted goods. As the borrower's customers submit orders for the
goods the bank releases goods to make the sales and the proceeds of the
sales are remitted directly to the bank to repay the loan.

3/19/17 39
 Loans granted to legal persons

Leasing is a process by which a firm can obtain the

use of a certain fixed assets for which it must pay a
series of contractual, periodic, tax deductible
payments. The lessee is the receiver of the services
or the assets under the lease contract and the lessor
is the owner of the assets.

Inventory financing loan that is secured by

inventory and is scheduled to be repaid from the
sale of that inventory. All the borrower's inventories
can be used as security on a loan. However, the seller
is not constrained from selling inventories, so that the
bank cannot control specific inventory items.

3/19/17 40
 According Private credit This type of credit is the one offered to
to the companies and individuals in order to perform their activity and
debtor's achieve certain goals;
and the
creditor's Public credit covers the public expenses of the state;
nature
According Credits for production support the companies in their
to the production process;
purpose of Credits for circulation covering the expenses with the
granting transportation and storing of goods;
the credit Credits for consumption - granted for the procurement of goods
for personal use;

According to Real credits based on a material security (real guarantee);

the nature of
the
guarantees Personal credits - based on personal moral guarantees (is the
pledge of a third party to pay the credit if the borrower cannot do
it).
 According Credits that can be declared exigible before their maturity date;
to the
extent of Credits that cannot be declared exigible before their maturity date
the
creditor's Mixed credits;
rights
According to Redeemable credits. The redeemable credit is a credit which
the way of involves installments, equal or not, and can be with or without
paying off interest.
the
Non-redeemable credits ("Balloon" credits). For these credits,
obligations
the reimbursement of the loan is done entirely at the maturity
of payment
date.

According to Short-term credits - granted for short periods of time (from

the maturity 1 to 6 months);
date of the Medium-term credit: they are granted for periods between 1
credit and 3 years;
Long-term credits: granted for long period of times.

There are obviously other forms of credit and

separated, according to other criteria, suggesting
a high degree of adaptability of the system to the
market 's credit.
 Other types of credits
Overdrafts are agreed lines of credit or borrowing facilities that
a personal or corporate customer may use by drawing on a
current account. Legally, overdrafts are repayable on demand.
In practice, a bank will not call in an overdraft if the customer
keeps within the agreed limits and fulfills the contractual terms.

Project loans are loans made to finance major capital

investment projects, for which the cash flow arising from the
project is either sole or the main source of the loan repayments.
Such projects are either for the creation of a major asset or for a
major improvement in the economic infrastructure. They are
usually made for the medium or long term and are substantial in
amount. The financing is usually done on long term and the
borrower is generally an "empty shell", an SPV ("special
purpose vehicle") - a company created especially for the
development of the project.

3/19/17 43
 Other types of credits
Syndicated loans are loans provided jointly by a number of
banks (when the size of the loan is one that individual banks would
be either unable or unwilling to provide alone). The syndicate is
brought together by one or more managing banks that have
negotiated and organized the lending package. The syndicate
members may not have any direct dealing with the borrower; the
borrower may not even be aware of the existence or identity of the
participants (an "undisclosed participation"), in which case the
borrower only discusses and negotiates with the Managing Agent.

Sovereign loans - banks lend substantial amounts to foreign

governments and the public sectors in overseas countries. These
loans (large amounts and with medium or long term) are backed
by little or no tangible security but rely on the covenant of the
sovereign state to which they have been made. If any security is
provided it usually consists of the guarantee of the borrowing
government or a pledge (gold reserves held externally).

3/19/17 44
 Other types of credits
Soft loans - loans with preferential terms (can include interest rates
lower than the market rate and long terms - over 30 years). In general,
they are made only by government sponsored agencies and to
industries, areas or countries in need of economic assistance.

Bridge loans - are short term project type loans that bridge a period of
time up to a specific event that generates sufficient funds for
repayment of the loan (examples: the banks lend large sums to
investment brokers to bridge their underwriting and placement of
securities issues until they can be sold to investors; interim (temporary)
construction and real estate loans to builders or land developers for the
purpose of acquiring and improving real estate).

Revolving credit loans - loans that finance the expansion of current

assets or the retirement of current liabilities. This type of loan is often
called asset-based lending because the amounts borrowed are tied to a
borrowing base formula that limits the outstanding amount to a margin
percentage on the borrower's receivables, inventories or even reserves
owned. They are made on a revocable basis: a loan agreement specifies
the available credit limit and the3/19/17
conditions under which funds are45
3.3. The Romanian legal framework
related to credit activity

3/19/17 46
When granting credits, banks must
obey some prudential requirements:
the minimum level of solvency, determined as a ratio between own
funds and the total of assets and elements outside the balance sheet,
weighed according to their risk degree;
the maximum exposure to a single debtor, expressed as percentage,
as a ratio between its total value and the level of bank's own funds or
as a maximum amount;
the maximum aggregate exposure, expressed as percentage, as a ratio
between the total value of great exposures and the level of own funds;
the minimum level of liquidity, determined according to the maturities
of the debts and bank's obligations;
the classification of the granted credits and the interests not cashed-in
related to them and the setting up of the specific risk provisions;
the currency position, expressed as percentage according to the level
of own funds;
the management of the bank's resources and securities;
the extension of subsidies network and other secondary bank centers.

3/19/17 47
 Important Romanian institutions
supervising the credit activity

The National Bank of Romania (NBR)

The Bank Deposit Guarantee Fund
TransFond
The Romanian Banking Institute
The Payments Incidents Bureau
The Credit Information Bureau

3/19/17 48
The National Bank of Romania
(NBR)
Set up in 1880, is the central bank of Romania, being the 16th
central bank in the world from a historical perspective.

An independent public institution, located in Bucharest, the

National Bank of Romania is the only institution authorized to issue
money - banknotes and coins - as legal tender on the territory of
Romania.

Itsprimary objective is to ensure and maintain price stability. The

National Bank of Romania supports the general economic policy of
the Government without prejudice to its primary objective (Law
No.312/2004).

What about the central bank in your country?

3/19/17 49
The National Bank of Romania
(NBR)
The domestic currency is the leu, with its fractional coin, the ban.

Starting with 1 January 2007, when Romania had joined the

European Union, NBR became part of the European System of
Central Banks (ESCB), and the NBR's Governor, member of General
Council of the European Central Bank (ECB).

The main tasks of the National Bank of Romania are the following:
to design and implement the monetary policy and the exchange rate policy;
to conduct the authorisation, regulation and prudential supervision of credit
institutions, and to promote and oversee the smooth operation of the
payment systems with a view to ensuring financial stability;
to issue banknotes and coins as legal tender to be used on the territory of
Romania;
to set the exchange rate regime and to oversee its observance;
to manage the international reserves of Romania.

3/19/17 50
 The Bank Deposit Guarantee
Fund
guarantees the reimbursement of deposits with credit
institutions by natural persons, legal persons or entities
without legal personality, according to the terms and limits
established by the law on the Fund's operating;

conducts activities as special administrator, interim

administrator or liquidator of credit institutions, if
appointed to act in such capacity;

sinceits setting up, the Bank Deposit Guarantee Fund

together with the Romanian Banking Association
representatives has had an active role in the drawing up
and enforcement of regulations on the for deposit
guarantee and payment of compensations to depositors, if
a bank goes bankrupt.

3/19/17 51
 The Credit Bureau
Established
following the initiative of the Romanian banking
community, the Credit Bureau is a joint stock company
which has 24 banks as founding members.

Inpresent, the Credit Bureau has 27 banks as

shareholders. Having become operational in August 2004,
the Credit Bureau currently manages negative and
positive data, supplied by banks and non-banks.

The aim of setting up the Credit Bureau was to provide

participants in the banking system real, updated,
aggregated and consistent information regarding
individuals who have loans with banks or non-banks, have
purchased an asset via leasing or have been insured
against default risk with an insurer.

3/19/17 52
 TransFond
Following the specials efforts of the central bank and the
banking community to conduct a structural reform of the
payment and settlement systems in Romania, currently,
Romania has a modern payment system, compatible with those
of the European Union.

The operator of the Electronic Payment System of

Romania is TransFond - the Company for Fund Transfer and
Settlement, a private firm established by the banking
community of Romania, having as shareholders the National
Bank of Romania (33,33%) and 25 commercial banks (66,67%).

The main line of business of TransFond is to provide clearing

and settlement services of cashless payments in national
currency for credit institutions, the National Bank of Romania,
the State Treasury and other financial institutions.

3/19/17 53
The Romanian Banking Institute
The Romanian Banking Institute (RBI) has as main target
vocational training, by specializing the staff working in banks,
according to the requirements established by credit institutions and
the National Bank of Romania, in cooperation with the Romanian
Banking Association and the programs endorsed by its Board.

The Payments Incidents Bureau

Set up in 1997 inside the National Bank of Romania, the Payments
Incidents Bureau is an intermediation center managing
information specific to incidents with payments
instruments (cheques, promissory notes, bills of exchange),
both from the bank's point of view (needed funds not being
assured) and from the social point of view (lost/stolen/damaged).
The information to Payments Incident Bureau is conveyed by
computer system through the Interbank Communication Network,
which links the head office of the National Bank of Romania to the
head offices of all banks.

3/19/17 54
 The Credit Information
Bureau
TheCredit Information Bureau was set up in 2000, in the National
Bank of Romania, as an intermediation center that manages
credit risk information and card fraud information.

The system collects, stores and centralizes information on the

exposure of every credit institution in the Romanian banking system
to the debtors that were granted loans and/or have commitments
totaling more than the reporting threshold, and on payments
overdue, as well as information on card frauds committed by
cardholders.

The users of the information in the Credit Information Bureau

database are the reporting entities - credit institutions and
mortgage loan companies - and The National Bank of Romania.

The exchange of credit risk information shall be performed

electronically, through the Interbank Communication Network.

3/19/17 55
3.3.1. The crediting activity in
Romania
Progressive changes made in the Romanian banking system's structure, the
increasing variety of banking products and services offered by credit
institution lead to the expansion of the banks' assets year after year. As a
result, the gap separating Romania from the European Union Member
States narrowed over the past several years.

Credit risk was significantly higher as financial intermediation increased.

Nongovernment loans recorded new considerable rises, particularly on the

back of credit to households.

Foreign
exchange credit, accounting for more than half of total non-
government loans, displayed a significant development.

The
loan portfolio quality of the Romanian banks remains adequate, at a level
comparable to that of other European countries.

Inthe context of foreign investors' increased risk aversion, the impact of

international market turmoil could become significant, by rendering the private
sector's access to external refinancing sources, particularly in the medium run,
more difficult and more expensive.
3/19/17 56
 Non-performing loan ratio 2012
2013
The relatively high non-performing loan ratio, which has a detrimental
impact on bank profitability, is also due to bank portfolios further comprising
a significant share of borrowers with overdue loans, including those with a
proven very low likelihood of repayment.
For instance, as regards the portfolio of household loans, around 70 percent
of non-performing borrowers had been in a state of default for more than a
year or had recorded multiple defaults as of June 2013.
Banks resorted on a relatively wide scale to loan restructuring/rescheduling
and foreclosure, yet the effectiveness of these NPL management techniques
has so far remained below potential.
The most visible positive effect of a wider recourse to the aforementioned
solutions would be the improved image of the domestic banking sector via a
reduction in the volume of low-quality assets. For example, the removal
from the balance sheet of any non-performing exposures vis--vis the
corporate sector would diminish this sectors NPL ratio from 23.4 percent to
7.5 percent.
This would result from the contraction in the large volume of non-
performing loans generated by borrowers with a low likelihood of servicing
their debt (loans overdue for more than 365 days amounted to lei 19.7
billion, making up 74 percent of total NPL, as of August 2013).

3/19/17 57
 Private sector loans by currency
The faster advance in the stock of foreign currency credit during the period under review
led to a wider share of this component in total loans to the private sector, namely 63.4 percent
at end-2011 and 63.7 percent in June 2012. This meant a cumulated increase of 0.8 percentage
points against June 2011 and was primarily due to supply-side factors, such as: (i) the availability
of long-term funding sources denominated in foreign currency (mainly parent bank loans), and
(ii) the interest rate differential between forex- and leu-denominated credit.
70.0

60.0

50.0

40.0

Private sector loans in

30.0 domestic currency percent

Private sector loans in

20.0
foreign currency

10.0

0.0

3/19/17 58
 Private sector loans by
maturity
Pursuing a prudent lending policy banks focused primarily on short-term credit, which led to
a progressive rise in private sector loans with maturities of up to one year, whose real annual
growth rate picked up in the period elapsed since the release of the previous report from 11.5
percent at end-2011 to 14.4 percent in June 2012. This brought about a wider share (25.0
percent) of short term loans in total credit to the private sector in June 2012, marking an
increase of 2.2 percentage points versus the same year-earlier period.
80.0

70.0

60.0

50.0

40.0
Short-term
percent
30.0
Medium-term

20.0 Long-term

10.0

0.0

3/19/17 59
 Private sector loans by
140.0
component
120.0
The dynamics of the
two components were
100.0 different in real terms.
80.0 Thus, the annual
60.0
Loans to dynamics of
households household loans
40.0 (volume) lei bn.
recovered the ground
20.0 Loans to lost since 2010 as late
companies
0.0 (volume) as January 2012,
reaching 4 percent
March through May
2012, before
decelerating to 1.3
10
By contrast, the annual percent in June 2012.
growth rate of corporate
loans followed a steadily 5

upward trajectory
loans to households
throughout June 2011 0
(growth rate) - rhs
June 2012, ending the (by reference to
period at 6.8 percent. -5
Sept. 2008) percent
When compared to the loans to companies
balance recorded in (growth rate) - rhs
-10 (by reference to
September 2008 , only
Sept. 2008)
corporate credit
managed to exceed, in -15
real terms, the level
3/19/17 60
prevailing prior to the
 The share of
Share of loans overdue for more than 90 days (gross exposure) in total classified loans and interests percent
loans overdue
18.0 for more than 90
16.0 days followed an
14.0 upward trend in
12.0 Share of loans overdue for more the analyzed
10.0 than 90 days (gross exposure) in
total classified loans and
period. Behind
8.0
interests percent this stood
6.0
4.0
primarily further
2.0
constraints on
0.0 customers
financial
standing, amid
Non-performing loans at aggregate economic
growth way
level
below rhs
Volume of loans overdue for more than 90 days (gross exposure), potential.
lei bn.
The situation is 40.0

the same in 35.0

terms of 30.0
volume of 25.0 Volume of loans overdue for more
loans overdue 20.0 than 90 days (gross exposure), rhs
lei bn.
for more than 15.0
90 days. 10.0
5.0
0.0

3/19/17 61
 Non-performing loans across banks
grouped by asset size
The higher NPL ratio in 2012 was partly due to the new
approaches implied by the IFRS accounting standards, but also
to customers financial standing. The surveys conducted among
credit institutions grouped by asset size have pointed to a better
loan portfolio quality in the case of large banks.
20.0

18.0

16.0
Share of loans overdue for more
14.0 than 90 days (gross exposure)
across the banking system
12.0 percent
Share of loans overdue for more
10.0
than 90 days (gross exposure)
for large banks
8.0
Share of loans overdue for more
6.0 than 90 days (gross exposure)
for mid-sized banks
4.0 Share of loans overdue for more
than 90 days (gross exposure)
2.0 for small-sized banks

0.0
40148 40513 40603 40695 40787 40878 40969 41000 41030 41061

3/19/17 62
 Loan portfolio quality in selected EU
countries (share of non-performing
loans in total loans)
With only a few exceptions, the worsening quality of loan portfolios remained a common feature
of the European financial market in 2011, given the depressed economic growth in the area, to
which added the losses induced by the sovereign debt crisis (the declining value of Greek bonds
was one of the factors that hit many of the large cross-border banks).
16.00

14.00

12.00

10.00 2006
perce
nt
8.00
2007

6.00 2008

2009
4.00 2010

2011
2.00

0.00

3/19/17 63
 Examples from other countries
What about the changes made in your own country
due to the international crisis?
What do you know about the rules and regulations
existing in your country concerning the credit
activity?
Is credit risk better administrated in your country
than in others?
What are the measures taken by the central bank
in your country in order to mitigate credit risk?
What are the levels of the loan portfolio quality of
the banks from your country?
What important institutions supervising the credit
activity do you know in your country?

3/19/17 64
 Top 5 Reasons for Loan Losses
1. Improper Industry Analysis

2. Failure to understand the

business

3. Over-emphasis on Historical
Financial Performance and
Inaccurate Projections

4. Inaccurate assessment of
Management Capabilities

5. Over-reliance on Collateral

3/19/17 65