Romania’s financial sector hasstrengthened significantly over the last few years.Effective supervisory measures have helped reduce the highlevel of non-performing loans (NPLs) from 21.5 percent atits peak in 2013 to 6.4 percent as of December 2017.However,some vulnerabilities are emerging. Banks’ holdings ofdomestic sovereign paper have grown large, exposing them tovaluation losses in case of an increase in interest rates orsovereign risk spreads. Banks’ indirect exposures togovernment guarantees through the Prima Casa program furtherstrengthens the sovereign-bank nexus. An increase ininterest rates may also negatively impact NPL ratios onbanks’ mortgage portfolios, which are growing fast and areat variable rates. The share of foreign exchange (FX)denominated loans and deposits significantly decreased, butremains relatively high, and a large share of corporateborrowers is unhedged. Finally, lending practices ofnon-bank financial lenders (NBFLs) may lead to loan defaultsand reputational risks for the banking sector. As thefinancial system is small, shocks may further discouragefinancial intermediation, which is already among the lowestin the European Union (EU). The NBR is transitioning to arisk-based supervisory approach that needs furtherenhancements. The new Supervisory Review and EvaluationProcess (SREP) Guidelines of the European Banking Authority(EBA) are still in the initial stages of implementation. TheNBR should conduct more risk-focused, banking industry-widethematic analyses and develop its off-site monitoring tools,such as by conducting bottom up stress tests.Financialintermediation relative to the economy is low anddeclining.On the demand side, credit needs remain, overall,limited due to low enterprise density, poor health of theenterprise sector, and high number of foreign owned firms(compared to peers). The economic growth had a positivespillover in the enterprise sector, but this did nottranslate into increased investment activity, despite anunprecedented low interest rate environment. On the supplyside, the supply of credit has been constrained by severalfactors including: i) an acute deterioration of assetquality, particularly among MSMEs, after the crisis, ii)banks’ deleveraging pressures, iii) deficiencies in thecredit enabling infrastructures (credit reporting,insolvency), iv) preference of banks for sovereign debt, aswell as government guaranteed debt in a context of fiscalexpansion, v) lack of depth in the NBFI segment, and vi)declining use of public partial credit guarantees due tooperational problems. As a result, access to credit isparticularly problematic for certain firm segments that areunderserved by the banking sector, including for micro,small and medium-sized enterprises (MSMEs), start-ups, theagriculture sector, and in rural areas.Improving financialinclusion may require broader solutions including i) abetter use of the Posta Romana network of branches, ii)measures to enable credit unions to expand and offer morefinancial services while strengthening supervision, iii) theadoption of incentive mechanisms to accelerate the expansionof digital finance solutions, and iv) the promotion offinancial inclusion and literacy as well as effectiveconsumer protection mechanisms.
PDF
download
878987797
028-85220240
