East-West Conference 2003

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Compared to other countries, the Romanian banking sector is small and not very developed. Total banking sector assets amount to about a third of GDP; in central European countries the respective average ratio comes to about 70%, in the euro area it reaches 260% of GDP. Throughout the 1990s, the Romanian banking sector was plagued by sluggish restructuring of the real sector, stop-and-go macroeconomic policies, weak supervision and adverse external conditions. Only after a severe economic slump (1997-99), an overhaul of banking legislation and a major cleaning up effort entailing the bankruptcy of a relatively large bank and a number of smaller banks did the situation stabilize. Confidence slowly rose and credit institutions expanded their activities. 

Total banking sector assets grew from 29.2% of GDP in 2000 to 31.6% in 2002. Loans to enterprises correspondingly rose from 9.4% to 11.9% of GDP. The year 2002 witnessed a real credit expansion to the enterprise sector of approx. 30%, which accelerated to about 40% in the first eight months of 2003. The speed of the credit expansion gave rise to concern on the part of the BNR leadership and the IMF. The maturity structure of loans moved somewhat from predominantly short-term (i.e. below one year) to medium-term. Consumer credits, notably mortgage loans, multiplied, but from a very weak point of departure. Credits denominated in foreign currency expanded particularly strongly and triggered growing imports. The BNR recently took measures to rein in credit growth. 

While foreign-owned banks have steadily gained importance in Romania and now dominate the sector, state-owned credit institutions still play a more important role than they do in most other neighboring countries. As of July 2003, three banks (of a total of 38 banks or 39% of total banking assets) were still in majority state ownership. The two largest are Banca Comerciala Romana (BCR) and Casa de Economii si Consemnatiuni (Savings Bank). 29 credit institutions (or 57% of bank assets) were owned by foreigners. The largest are Banca Romana pentru Dezvoltare (Romanian Development Bank, owned by Société Générale), ABN Amro Bank and Raiffeisen Bank. As regards registered statutory capital, Austrian banks are leading among foreign banks, followed by Greek and French banks. Six credit institutions (only 4% of bank assets) are in private Romanian hands. 

The BNR has been striving lately to further improve banking supervision practices. In early 2003 loan classification and loss provisioning rules were tightened. Due to increasing competition, interest rate spreads have been declining, but they are still high (July 2003: 14.5%). Banks’ liquidity is generally satisfactory, profitability has been on a rising trend, though most recently it declined, due to the narrowing of spreads. In May 2003, the overall capital adequacy ratio was measured at the high level of 23%. The share of non-performing loans in total loans amounted to 11% in June. The authorities intend to come into compliance with IAS in 2005. In mid-October 2003 Romania successfully concluded its first IMF Stand-by Arrangement. 

If framework conditions do further adjust, there remains ample growth potential for the Romanian banking sector in the medium and long term. But major shortcomings still need to be addressed, including banks’ insufficient risk analysis and management capacities, weak corporate governance, continuing limited contract enforcement capacities, weak creditor protection, sprawling bureaucracy, corruption.