The National Bank of Serbia (NBS) has published its Q3 2023 Trends in Lending report, an in-depth assessment of bank lending, cost of borrowing by businesses and households, and the outlook for the lending market based on credit supply and demand drivers.

Year-on-year (y-o-y) bank lending to the non-monetary sector continued to decelerate in Q3. Excluding the exchange rate effect, in September the stock of domestic loans remained broadly unchanged (down by 0.1 percent) relative to September 2022, with corporate loans going down by 1.8 percent and household loans up by 1.6 percent y-o-y. The slowdown in domestic lending resulted from last year’s high base, the maturing of guarantee scheme loans, higher lending interest rates due to monetary tightening by the European Central Bank (ECB) and the NBS, and banks’ tighter lending standards.

Lending to businesses

Year-on-year growth in corporate loans remained in negative territory in Q3, down by 1.8 percent y-o-y in September. This reflected the high last year’s base, the maturing of guarantee scheme loans, and monetary tightening by the NBS and the ECB. In nominal terms, the stock of corporate loans stood at RSD 1,603.5bn in September and their share in GDP at 20.6 percent, down by 2 percentage points (pp) compared to end-2022.

Corporate loans rose by RSD 19.2bn, or 1.2 percent, in Q3, thanks to elevated borrowing by companies (RSD 31.5bn), while lending to public enterprises declined (RSD -12.2 bn). The maturing of guarantee scheme loans, approved mainly in dinars (over 60 percent) caused a decline in dinar loans, while FX-indexed corporate loans expanded.

By purpose, growth in Q3 was led by investment loans (RSD 19.1bn), followed by liquidity and working capital loans (RSD 2.8bn). The lower growth in liquidity and working capital loans was due to increased corporate profitability and the maturing of guarantee scheme loans, whose impact, the most pronounced in H1, has gradually been waning as maturing loans have been tailing off. Current account overdrafts also increased to an extent (RSD 1bn), while a decline was recorded for other non-categorised loans (RSD -1.9bn) and import loans (RSD -1.8bn). As a result, relative to June, the share of liquidity and working capital loans, the two most common types, in total corporate loans fell to 46.7 percent in September, while the share of investment loans rose to 41.6 percent. Other non-categorised and import loans came second, accounting for 6.7 and 3.9 percent of corporate loans, respectively.

By industry, in Q3, the borrowing of companies operating in manufacturing, real estate and transport increased, while debt repayment was the most pronounced for energy companies, followed by those in trade and agriculture.

The volume of new corporate loans in Q3 equalled RSD 302bn, down by 6.4 percent y-o-y. Liquidity and working capital loans (59 percent) remained the most commonplace, followed by investment loans (26.7 percent), which, in contrast to all other loans, recorded minimal y-o-y growth. Micro, small and medium-sized enterprises accounted for slightly more than one-half of all working capital and investment loans.

Corporate receivables were less dinarised in Q3, with the ratio dropping by 0.7pp to 16.3 percent in September as dinar receivables contracted due in part to the maturing of guarantee scheme loans, most of which were denominated in dinars, whereas FX-indexed receivables continued up. At the same time, the share of euro-indexed receivables and euro receivables increased by 0.7pp to 83.5 percent in September, whilst the share of USD receivables has remained flat since early 2023, at 0.2 percent.

The share of NPLs in total lending to companies stood at 2.4 percent in September, a slight decline compared to June. By industry, in September the share of NPLs ranged between 0.3 percent for energy and 4.1 percent for agriculture, while the real estate sector recorded a new low (of 2.1 percent). At end-Q3, the capital adequacy ratio measured 22.2 percent (0.1pp lower than at end-Q2), over the regulatory minimum by as much as 8.0 percent, suggesting the banking sector was well capitalised and resilient to both external and domestic risk.

Continued monetary tightening by the NBS and the ECB in Q3 pushed the interest rates on dinar and euro-indexed corporate loans further up, but the rise was less pronounced than previously. Interest rates rose for almost all types of loans. Aiming to address strengthened inflationary pressures, primarily coming from abroad, since October 2021 the NBS has been gradually tightening monetary conditions by raising the weighted average interest rate on one-week reverse repo auctions and, as of April 2022, by also raising the key policy rate. As monetary tightening was somewhat more moderate in Q3, the weighted average interest rate on new dinar corporate loans rose less markedly, to 8.6 percent from 8.5 percent in Q2.

The October 2023 NBS Bank Lending Survey revealed that, in Q3, in line with expectations voiced in the previous measurement, banks made their corporate lending standards somewhat stricter, a practice anticipated to continue into Q4. The tightening was similar to that seen in H1, with standards made more stringent for both dinar and FX-indexed loans, mainly for large enterprises. Moreover, the Q3 Bank Lending Survey also showed an increase in interest margins for companies of all sizes, tightened collateral requirements, and a cut to the maximum loan amount. Lastly, contrary to expectations, demand for loans from large enterprises and farmers fell.

Banks expect corporate loan demand to rise in Q4, driven by the financing of working capital and capital investment and less so by debt restructuring.

Lending to households

In nominal terms, the stock of household loans stood at RSD 1,469.3bn in September, accounting for 46.9 percent of banks’ loan receivables from the non-monetary sector and 18.9 percent of GDP. Year-on-year growth in household lending continued decelerating in Q3, measuring 1.6 percent in September (vs 2.7 percent in June). The deceleration is a result of last year’s high base effect and higher interest rates.

In Q3, household loans increased by RSD 6.6bn, or 0.4 percent, driven by the rise in cash loans (RSD 8.5bn), while the stock of housing loans declined by RSD 2.7bn from end-June. Further, consumer loans increased by RSD 0.7bn, with transaction account debts growing by RSD 0.3bn.

Rising interest rates led the NBS to cap interest rates on first-time variable-rate housing loans under EUR 200,000 for a period of 15 months, with banks not allowed to recoup the difference in interest rate. The cap should reduce most loan instalments by between 10 and 25 percent, resulting in greater disposable income for borrowers. In addition, the temporary cap also affects housing loans approved after the decision was enacted and allows early repayment of housing loans under concessionary conditions.

At RSD 132.3bn, new household loans in Q3 were slightly lower (by RSD 0.7 bn) than in the same period of 2022. Cash loans accounted for almost two-thirds, whilst housing loans made up 15.5 percent of new household borrowing (less than in Q3 2022, when their share averaged 23.3 percent), as a consequence of the rise in real estate prices and greater cost of borrowing.

The share of NPLs in total household loans stood at 4.4 percent in September (0.1pp more than in June), with no significant changes registered in terms of loan type.

The tightening of monetary policy by both the NBS and the ECB in response to inflationary pressures continues to have a knock-on impact on the cost of household loans which, as with corporate loans, has continued to increase, albeit at a slower pace.

In Q3, the weighted average rate on new dinar household loans equalled 13.4 percent. The average interest rate on cash loans, the most common type, rose by 0.1pp to 14.2 percent, with the rate on other non-categorised loans growing by 0.2pp to 11.3 percent. Relative to September 2021, before the NBS first began restricting monetary policy, the interest rate on new dinar-denominated household loans was higher by 4.9pp as at September 2023.

The weighted average rate on new euro-indexed household loans went up by 0.1pp on average in Q3, to 7.3 percent. Interest rates on housing and consumer increased by 0.1pp each, to 6.6 and 6.4 percent, respectively. The rate on cash loans remained unchanged from Q2 (at 3.6 percent), whilst the rate on other non-categorised loans rose by 0.4pp to 9.6 percent. As at September 2023, the average rate on new household euro loans had increased by 3.5pp relative to June 2022, directly before the ECB launched its cycle of interest rate hikes.

According to October’s NBS Bank Lending Survey and in line with the expectations stated in the previous measurement, banks tightened household credit standards in Q3, which mainly affected dinar-denominated cash and refinancing loans as well as euro-indexed housing loans. These new restrictions were primarily driven by higher financing costs. Banks reported interest margins dipped in Q3 on the back of reduced margins for FX-indexed loans, reflecting the NBS’s decision to cap interest rates on euro-indexed housing loans whilst the interest margins for dinar loans increased slightly. Banks expect household credit standards to remain unchanged in Q4.

Demand for household loans dropped in Q3 by more than had been expected in the previous survey. The demand for all loan categories declined, except for dinar-denominated consumer loans, which recorded growth. Banks believe higher housing prices depressed demand for loans, coupled with subdued purchases of durable consumer goods and the use of savings.

In Q4, banks anticipate a renewed increase in demand driven by dinar-denominated cash, refinancing, and consumer loans.