Banks cautious about raising interest rates, MBA’s Shterieva tells MIA
Skopje, 7 August 2022 (MIA) – Banks are cautious about raising interest rates given that a sharp and rapid increase can affect the ability of borrowers to service their obligations, President of the Macedonian Banking Association (MBA), Maja Stevkova-Shterieva, told MIA in an interview.
In the interview, which is available in full below, MBA’s President advises borrowers or bank depositors to pay attention to the provisions of the loan agreements in order to avoid misunderstanding or unnecessary panic about interest rates.
The National Bank has increased the basic interest rate several times so far, and it now stands at 1.25 percentage points. How much has this affected the interest rates of loans?
According to the data published by the National Bank as with June 30, 2022, on an annual basis the average interest rates on loans and deposits at the level of the banking sector see a slight downward trend. In June, the average interest rate on total loans recorded a slight monthly drop of 0.01 percentage points, and the average interest rate on total deposits remained at the level of the previous month. Bank interest rates response has never been this slow and cautious. It’s clear that under conditions of inflation there must be an increase in interest rates and the signal of the National Bank is a reaction to the macroeconomic and monetary situation in the country. However, banks are cautious given that a sharp and rapid increase in interest rates can affect the ability of borrowers to service their obligations, and this particularly applies to the population.
Can we expect an increase in interest rates for citizens and the economy?
It’s clear that the signal sent in terms of raising interest rates through the continuous increase of the interest rate by the National Bank will lead to a further increase in the interest rates of the deposit and loan products of the banks. However, it must be pointed out that the amount of the change, the timing and the banking products that will be concerned are part of the business policy of each bank, and therefore it is best to follow the announcements of each individual bank.
Also, it’s good to mention another important information related to interest rates. Over the past years, more attention was paid to the awareness of bank clients, especially the population, in the area of transparency of interest rates, their changes, as well as the increasing offers of fixed interest rates. In this sense, under conditions of growth of interest rates, it’s advisable that borrowers or bank depositors pay attention to the provisions of the loan agreements in order to avoid misunderstanding or unnecessary panic about interest rates. Fixed interest rates by definition don’t change for the period they are fixed and in that case there’s no need to panic. But it is very important to pay attention and see the provisions in the loan agreements.
The National Bank made a decision to further strengthen the resilience of the banking sector. Namely, from August 1, 2023. How necessary is such a measure under the current circumstances? Does the banking sector remain stable and does it have the capacity to respond to the needs of the citizens and the economy?
The still-present threat of COVID-19, the effects of the war in Ukraine and the rising inflation rate cause great uncertainty in terms of economic growth, as well as projections for the next 12-18 months. The cost of living is increasing not only in Macedonia, but across the European Union as the main trading partner of our country, which in fact results from the rise in energy and food prices, as well as the still-disrupted supply chains.
From the position of the Macedonian Banking Association, we wouldn’t directly comment on the necessity of the measure adopted by the National Bank, given that it has available numerous data that it uses to make appropriate decisions. We can only stress that the banking system is stable, well-capitalized, and the capital and reserves have proven to be sufficient for the banks to deal with the challenges so far. We stress – the challenges so far, because it is clear that amid these new and unpredictable circumstances, we will inevitably face numerous and heterogeneous challenges in the period ahead of us.
Undoubtedly, the decision to introduce a countercyclical buffer is based on appropriate parameters for determining the need for such protection, and this was certainly taken into account by the National Bank when making such decision. The trend of introducing a countercyclical buffer, which requires higher adequacy of the capital of the banks, is in line with measures being introduced in a larger number of countries in the European Union in the coming period, and the measure mentioned has already been implemented in some countries.
What will this measure mean for banks and savings houses?
Having in mind all the previously mentioned factors that affect the operation of the economy and the living standard of the population, as well as the increasingly present inflationary spiral, it’s obvious that it is necessary for all stakeholders to carefully take measures and actions looking at all current risks, as well as possible risks that can be created with certain new measures. Therefore, the central bank’s concerns are certainly understandable in terms of the future and the stability of the banking system, economic growth and the ability of banks’ clients to service their obligations.
The fact is that in order to be able to provide solvency support for the economy and the population, we must have a healthy banking system, and the best defense for that is maintaining a solid capital base of each individual bank. It must be taken into account that the growth of the capital base of a bank is directly dependent on two factors – the profitability of the banks and the distribution of that profit, as well as the readiness of the shareholders of the banks to directly recapitalize through new investments of their funds in the capital of the banks. Although the more conservative distribution of bank profits may seem like an easier way out in order to strengthen capital adequacy (instead of paying a dividend, banks’ reserves will increase), it must be taken into account that it is a direct disincentive for bank shareholders to own shares in this sector compared to other sectors as an investment opportunity where the payment of dividends doesn’t depend on such factors.
In the case of the Macedonian banks, based on the publicly available data, it can be concluded that most of the banks are operating profitably with a solid growth in profit achieved in H1 2022. Although it has been a common practice of the banks in Macedonia to allocate part of the profit in reserves, with the latest measure for countercyclical buffer this practice can be expected to continue, and depending on the individual calculations of each bank, it can be as a higher percentage of the profit. In other words, some banks may decide to increase capital by allocating part of the profit in reserves instead of paying dividends. We believe this is precisely why the National Bank is announcing this decision at a time when banks are starting to prepare their 2023 plans, considering the need for timely planning of the allocation of 2022 profits and the possibility of increasing reserves.
Biljana Anastasova-Kostikj
Photo: Darko Popov
Translated by Nevenka Nikolikj
