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Cheap national currency loans for the economy

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April 22, 2016 18:26

On February 21st, Prime Minister Myasnikovich announced implementation of a step-by-step strategy regarding loans interest rates reduction.

High interest rates on loans hamper modernization, which has been declared an economy’s priority in the coming years. With the means available the National Bank lowered rates on the interbank market, which is a prerequisite for reducing the loans’ costs. Deposit investments profitability will be reduced, and the bankers will be asked to share revenues in the name of “the economic needs”.

The average rate on overnight loans in the interbank market in the national currency in January 2013 was 35.4% for loans to residents. Enterprises could obtain loans at 40% p/a and higher, which, taking into account the declining profitability of sales in the economy up to 7% in December, is a prohibitive rate. Slight increase in lending to some public enterprises in the national currency is linked to the ‘subsidies for modernization programme’ practices. This mechanism is used, because such subsidies relate to industrial subsidies and do not reduce GDP by their amount. Private enterprises do not have access to these practices and reduce the amount of debts to the banks.

Using credit auctions, the National Bank marked the desired level of interest rates in the interbank market at 35% p/a. The liquidity problem for the backbone state-owned banks remains unresolved, which hinders reduction of rates in the interbank market. In the second half of February, the National Bank was able to solve the problem and the rates fell below the refinancing rate standard (30% p/a). The recommendation to limit the margin on loans issued by banks with lower interest rates will reduce the cost of credits.

The problem of high interest rates on loans reached the highest state level. To compensate for the ban on mortgages in foreign currency, the National Bank has decided to issue loans with substantially reduced rates to poor people, who cannot benefit from preferential programmes. As of February 25th, this social group can borrow at a reduced rate – 16% p/a – which will strengthen the housing construction industry. Statement by the Prime Minister and the President indicate, that possibly, banks will be offered to lower rates for special categories of borrowers, “for modernization purposes”, for enterprises that cannot benefit from public programmes.

Thus, the reduction of interest rates on loans has been declared a national task, and conventional donors, the banking sector and individuals, who have placed deposits in the banking system, will be forced to share partially their incomes through lower pays for borrowed funds. If banks practically have no other choice, individuals may transfer their savings from national currency deposits to foreign currency deposits with depreciation sentiments increasing.

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