The crisis also increases non-performing loans

The Central Bank (CBCG) expects an increase in non-performing loans (NPLs) due to the economic crisis caused by the coronavirus pandemic. NPLs consist of loans that banks cannot collect and whose repayment is overdue for more than three months.

Data from the supreme monetary institution show that gross non-performing loans at the level of the banking system for March this year amount to 160,6 million euros and represent 5,09% of total gross loans.

Compared to March 2019, they recorded a decrease of 9,85%.

Total approved bank loans at the end of March 2020 amounted to EUR 3,15 billion.

"It is to be expected that non-performing claims will grow, but not to the extent that the capital position of banks would be derogated from. CBCG recommended banks to carefully monitor the development of the situation in cooperation with clients, with a timely prediction of the impact on their cash flows, and to make adjustments to the repayment terms of their obligations in accordance with the new expected cash flows of clients. When approving new loans, banks should consider the impact of the events caused by the pandemic on the expected cash flows of potential borrowers, all with the aim of reducing the possibility of an increase in NPLs", informed "Vijesta" in the CBCG in response to the question of how the coronavirus pandemic will affect the movement of NPLs in the following period, whether they may increase and by how much.

Increased risks

Credit agency "Standard & Poor's" in the revised report for Montenegro indicated that the banking sector will probably soon face an increase in NPLs.

"The risks to the stability of the banking system of Montenegro have increased. We anticipate an increase in NPL levels as households and corporations are impacted by the economic downturn due to the pandemic. Positively, the Montenegrin banking system enters this crisis in a relatively strong position with a solid level of capital, NPL at a low 5 percent and high liquidity. The system is dominated by subsidiaries of foreign banking groups, and is mostly financed by domestic deposits. So far we have not observed any noticeable flight of deposits, and in our base scenario we expect this situation to remain stable. However, given the CBCG's limited ability to stabilize the banking system, it remains vulnerable to stress if NPLs rise sharply or liquidity dries up," the report emphasized.

The CBCG, which is headed by Governor Radoje Žugić, explained that bad loans recorded a downward trend during the previous three years, i.e. that share in total loans was almost halved in the observed period.

The government, in its opinion on the bill on the postponement of credit obligations of borrowers, by which the Club of SDP deputies proposed that banks waive interest on loans during the three-month moratorium, stated that this would have a significant effect on the operations of banks with the increase in the level of bad loans.

The Government's opinion states that due to the current economic situation, banks will face higher costs of provisions for expected losses, and a higher level of bad loans corresponds to a higher level of these provisions.

"This results in a lower net profit for banks, and in extreme cases, even loss-making operations. Taking into account the decrease in economic activity, the increase in unemployment and the decrease in average earnings that are expected as a result of the new coronavirus pandemic, an increase in the level of NPLs is expected in the future. This will result in a higher level of provisions, i.e. a lower net profit of banks and loss-making operations. It was precisely the high level of NPLs, which in the worst period of the crisis reached the level of 25%, i.e. provisions for expected losses in the period of the last crisis, that caused the low level of banks' income, i.e. the operations of some of them in the loss zone. and a negative effect on capital, own funds and the solvency ratio", according to the recent opinion of the Government, which was prepared by the supreme monetary institution in accordance with the Law on CBCG.

Return of 36,7 million debt under a special law

The CBCG said that in accordance with the Law on Financial Debt Restructuring, a total of 36,7 million euros in loans were restructured.

With that law, it is possible for companies and citizens who have defaulted on their loan repayments to enter into an agreement with the banks on their restructuring, that is, the return of loans on more favorable terms.

"Of which 35,1 million euros or 95,7% pertained to companies, and 1,6 million euros or 4,3% to citizens," the CBCG said.

The Law on Consensual Financial Restructuring of Debts expired in May 2019, and was enacted with the aim of reducing bad loans.

That law has been in force since May 2015 and was supposed to be valid for two years.

However, it did not give significant results in practice because problems arose in its application. This led to amendments after the expiration of the two-year validity period.