Restrictions on foreign currency lending carry risks

April 22, 2016 18:43

As of January 16th, 2014, only BYR loans will be issued for domestic payments. This National Bank regulation aims to reduce the growth of bad foreign currency loans; however, it may also reduce industrial activity and significantly deteriorate settlements in the economy.

On January 4th, the National Bank adopted a resolution which restricts the provision of foreign currency loans for domestic settlements.

According to the National Bank, in December 2013 the annual interest rate on corporate BYR loans was 45.1% per annum, while on currency loans – 8.2% per annum. Given the dynamics of the BYR strength against a currency basket in Q4 2013, corporate foreign currency loans were cheaper than BYR loans by 35%.

An enterprise could receive a currency loan and sell it at the forex to receive BYR. As of January 16th, 2014, the National Bank banned the use of foreign currency loans in domestic settlements and their use for purposes other than settlements with non-residents. The reason behind the National Bank’s decision was a growing proportion of bad currency loans in the banking system. In January – November 2013, the volume of problem loans in foreign currency increased from USD 79.1 million to USD 144.4 million, or by 82.6 %. By limiting the issuance of foreign currency loans, the National Bank attempts to solve two problems: to lower growth of distressed foreign currency loans and to reduce the potential risks for the banking system and businesses in the event of considerable BYR exchange rate fluctuations.

For the real economy, the consequences of this decision will be as follows. The unavailability of credit resources will force businesses to solely concentrate on activities in which settlements are the least problematic and do not bear the risks of non-payment. This will decrease the production. Currency loans allowed for mutual settlements. Their unavailability will result in further increase in overdue debt, extended settlement deadlines and longer production cycles at enterprises. The banking sector will lose part of income and will be forced to increase interest rates on foreign currency loans for settlements with non-residents to compensate for the losses. The National Bank will lose a certain percentage of the currency supply in the domestic market, which may increase the pressure on the BYR.

Thus, in light of problems on the currency market, the National Bank adopted a controversial decision. Leveling currency risks is a priority for the regulator, but it may result in an adjustment of financial and industrial activity in the economy.