Borislav Ivanov, Director of Deutsche Bank’s Representative Office in Sofia: Banks should pay attention to SMEs

- Mr. Ivanov, how is the corporate banking market in the country developing after three years of crisis? What are your expectations for next year?
- The last years were difficult for the corporate banking market and there was stagnation in the sector. However, the problems of development are multifarious. We are all aware that lending has shrank and the appetite for risk has decreased considerably. In 2006-2008, we witnessed a huge appetite for risk and each bank aimed to achieve a higher market share, ignoring dangers. The consequences of ignoring risk led to the high level of non-performing loans at present. Banks are in a situation of having extended too many credits, given the capital and collateral presented as security. Before the crisis, some projects received 100% financing without a single lev of own capital. In some cases, the loans extended even exceeded the cost of the project several times.

After the boom years, however, the crisis came and banks changed completely their pattern of lending instead of seeking a balanced strategy. Financial institutions are currently interested in extending credits since they have amassed a huge resource and they should utilise it through lending. The problem is that the criteria are already much more rigorous, almost no projects are being approved. Therefore, a golden mean for risk should be set. But then, we come across another paradox - all banks target the same customers: several large companies which are financially stable and highly profitable, while small and medium-sized businesses remain without financing.

I think that, next year, financial institutions should pay attention to small and medium-sized companies in particular because they are the backbone of the economy. It is evident that they are in a difficult situation at present because they have exhausted their liquid reserves and it is hard for them to obtain new loans. There are tentative signs of a stir-up in lending but it is not at the level businesses need. Banks keep businesses alive but they are not pouring in a sufficient amount of fresh capital to restore growth. That is why a clear direction should be chosen from a macroeconomic point of view. Companies with the potential to develop should either be financed or they should be allowed to terminate their operation. Of course, this is easier said than done.

- Non-performing loans continue to be a hot issue since their share has been increasing in every subsequent quarter. Are the levels of bad loans alarming, given that their share is largest exactly in the corporate sector? Is there a risk for banks?
- Of course, non-performing loans are a concern for businesses, the economy and the banking system, but not to such an extent as to be dangerous. The Bulgarian National Bank has implemented a very good policy in recent years by forcing banks to maintain high capital adequacy. It is about 18% at present. This is a record level, compared to other European countries where the respective figures are well below 9%. This is a very large buffer for the system and it allows for problematic loans to be absorbed. Moreover, a large part of the bad loans are secured and even if they are written off, this will not be at a 100%. Banks will determine when non-performing loans will reach their peak. We see that the problem has been shifted forward in time in the past 2 years but this is harmful for the entire system. If banks had tackled the issue of bad loans in 2009, this would have been detrimental to customers but, maybe, we would have began to recover by now. The sooner the loans are restructured, the faster will we recover from the crisis.

- At present, our country is highly appreciated because of its sound fiscal discipline. But how do foreign investors assess the business climate in Bulgaria and what are the most common obstacles that they face here?
- There is a big difference between the real economy and state finances. For example, Italy has a highly developed sector of small and medium-sized businesses, but the State is heavily indebted. The situation in our country is the opposite – we have very sound public finances on paper but domestic consumption is on the decline every month. I know from various retail chains that there has been a 15-20% decline in consumption this year, especially in terms of basic commodities. This means that there is poverty and insecurity in the country. Foreign businesses monitor the real economy which is not in good condition. Investors who want to invest in the processing industry, for instance, worry about many other things such as the high level of corruption, the weak judicial system and the sluggish administration.

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