Trends in Lending, Q1 2024

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.

Total domestic loans, excluding the exchange rate effect, accelerated their year-on-year (y-o-y) growth to 1.3 percent in March (from 1.0 percent at end-2023), mainly on the back of household loans, which sped up to 2.7 percent y-o-y. On the other hand, corporate loans stagnated in March in y-o-y terms. Lending has remained under the sway of elevated interest rates on dinar and euro-indexed loans due to the previous monetary tightening of the NBS and the European Central Bank (ECB).

Total domestic bank receivables from the non-monetary sector (which apart from loan receivables also include receivables on account of investment into securities, interests and fees and other receivables) picked up y-o-y to a similar extent as domestic loans, to 1.4 percent in March.

Lending to businesses

Corporate loans, excluding the exchange rate effect, declined by RSD 26.6bn or 1.7 percent in Q1, in part due to a seasonal contraction in lending early in the year.

Corporate loans stagnated in y-o-y terms in March (vs 0.9 percent growth in December 2023). In nominal terms, the stock of corporate loans stood at RSD 1,584.6 bn in March, accounting for 19 percent of GDP, down 0.8pp compared to end-2023, as a result of economic growth.

As noted above, corporate loans decreased by RSD 26.6bn in Q1, partly due to a seasonal contraction in the approval of these loans early in the year, with loans to public enterprises recording a sharper fall (RSD 16.5 bn). The fall reflected a decrease in FX-indexed loans, while dinar loans were on the rise for the second consecutive quarter. The increase in dinar loans reflected, inter alia, banks’ adjustment to the provisions of the earlier adopted measure of the NBS. Under this measure, when calculating the capital adequacy ratio, as of 2025, banks shall reduce capital if the share of FX-indexed and FX loans in total loans approved to the non-financial and non-governmental sector after 1 July 2023 exceeds 71 percent.

By loan category, Q1 saw a reduction in receivables for investment loans (by RSD 22bn), liquidity and working capital loans (RSD 11.2bn), in part due to the maturing of guarantee scheme loans, as well as under other non-categorised loans (down by RSD 5.1bn). On the other hand, borrowing under import loans went up (RSD 10.2bn), as well as under current account overdrafts (RSD 1.5 bn).

The share of liquidity and working capital loans in total corporate loans gained 0.1pp in Q1, reaching 46.9 percent in March, while the share of the next largest category, investment loans, shrank to 41.2 percent (from 41.9 percent at end-2023). Other non-categorised and import loans accounted for 6.2 percent and 4.5 percent of the corporate loan stock. Investment loans continued to record y-o-y growth, which equalled 2 percent in March.

Corporate borrowing shrank across all industries, mainly in the transport, agriculture and construction, while companies in energy and trade increased their borrowing. In a closely related development, micro, small and medium-sized enterprises repaid their bank loans to a greater extent than large enterprises, so the share of loans approved to this enterprise segment in March (58.7 percent) was 0.4pp lower than at end-2023 and their stock was 2.2 percent lower than a year earlier.

The volume of new corporate loans in Q1 amounted to RSD 244.4bn, up by 2.3 percent y-o-y. Liquidity and working capital loans remained dominant, at 62 percent of new corporate loans, with slightly over a half of these loans being channelled to micro, small and medium-sized enterprises. Investment loans accounted for one fifth of new loans and two thirds of these loans went to micro, small and medium- sized enterprises.

Reflecting a decrease in FX-indexed receivables and a rise in dinar receivables of corporates, the degree of dinarisation of corporate receivables increased from 17.3 percent at end-2023 to 17.8 percent in March. The share of euro-indexed and euro receivables dropped by 0.4pp to 82.1 percent in March, while the share of dollar receivables stayed unchanged from the beginning of the year, at 0.2 percent.

The share of NPLs in total corporate loans stood at 2.3 percent in March or 2.6 percent for loans to companies alone, which is an increase by 0.2pp each compared to end-2023. By industry, the share of NPLs in March ranged between 0.7 percent for energy and 4.6 percent for transport, while the real estate sector recorded a new low (0.9 percent). This indicates that economic support measures during the pandemic were adequate and timely and bank asset quality was preserved even after their expiry. At the same time, this confirms that the rise in the costs of repayment of existing corporate loans did not lead to any significant increase in NPLs. The share of NPLs in total corporate loans went down by 22.6pp relative to July 2015, immediately before the NPL Resolution Strategy was first introduced, with the most prominent decrease recorded in construction, real estate, and trade.

The cost of corporate borrowing went down. Due to minimal interest rate volatility in the Serbian and euro area money markets registered in Q1, the average interest rate on new dinar corporate loans dropped slightly. Interest rates in the money market levelled off, contributing to a mild decline in the weighted average interest rate on new dinar loans in Q1, to 8.2 percent (down from 8.4 percent in Q4 2023), however the weighted average interest rate on new euro and euro-indexed loans to corporates stayed almost unchanged relative to Q4 2023, amounting to 7.1 percent in Q1.

Lastly, the NBS’s April 2024 Bank Lending survey revealed that in Q1, for the first time after a prolonged period of tightening, banks relaxed corporate credit standards, with the trend expected to continue into Q2. Standard easing mainly concerned dinar loans and was supported by the lower costs of the funding sources, the impact of the competition and positive economic outlook. Standards were eased for small and medium-sized enterprises

Lending to households

Excluding the exchange rate effect, household loans increased by RSD 20.9 bn or 1.4 percent in Q1, driven by the rise in cash loans, followed by housing loans and borrowing in transaction accounts.

The y-o-y growth in household loans accelerated to 2.7 percent in March (up from 1.2 percent at end-2023). In addition to the rising demand and intensified disbursement of new loans, the acceleration was driven by the gradual waning of the adverse impact of the accounting treatment of housing loan receivables on the stock of loans due to cap on interest rates on housing loans introduced in September 2023. In nominal terms, the stock of household loans stood at RSD 1,485.9bn in March, accounting for 47.4 percent of banks’ loan receivables from the non-monetary sector and 17.8 percent of GDP (0.2pp lower than at end-2023).

Household loans increased in Q1, by RSD 20.9bn, driven by the rise in cash loans (RSD 13.9bn), followed by housing loans (RSD 4.5bn) and borrowing under transaction accounts (RSD 1.9bn). The said movements were conducive to an increase in the share of cash loans, as the dominant loan category, by 0.3pp in Q1, to 45 percent of total household loans in March, while the share of housing loans declined to the same extent, to 39 percent. At the same time, the stock of liquidity and working capital loans to sole traders increased by RSD 1.5 bn, while the stock of investment loans dropped by RSD 0.5bn.

To provide relief to housing loan beneficiaries amid rising interest rates, in September 2023, the NBS temporarily capped the interest rate for first-time borrowers with variable interest rate loans of up to EUR 200,000 approved before the cap decision took effect. For those borrowers the nominal interest rate was restricted for a 15-month period starting from the October instalment, and their banks will not be allowed to seek to recover any difference in interest due to the NBS cap.

The volume of new household loans amounted to RSD 157.8bn in Q1, up by 31.5 percent y-o-y. This was driven mainly by cash loans, which accounted for almost 70 percent of new household loans, with housing loans coming second.

Borrowing in dinars accounted for over four-fifths of the rise in household loans in Q1 (mainly on account of cash loans), boosting the dinarisation of household loans in Q1 by 0.4pp, to 54.5 percent in March. At the same time, the share of euro receivables declined by the same degree, to 45.4 percent, while the share of receivables in Swiss francs (0.1 percent) was unchanged.

The share of NPLs in total household loans stood at 4.3 percent in March, down 0.1pp from end-2023 with the most dominant loan categories (cash and housing loans) recording a drop in this share. NPL indicators, still close to their lowest values, suggest that NBS and Government measures were timely and that they helped avoid more serious adverse impact of the crises we have been facing in the past three years on citizens’ creditworthiness. Compared to the period just before the adoption of the NPL Resolution Strategy, the NPL share in the household sector was lower by 7pp in Q1 2024.

After a fall in the previous quarter, the average cost of dinar borrowing and household borrowing in euros dropped mildly in Q1. The weighted average rate on new dinar household loans equalled 12.5 percent, down 0.2pp from Q4 2023. The decrease was driven by interest rates on cash loans, which went down by 0.5pp to 12.9 percent, whilst the interest rate on other non-categorised loans remained almost unchanged (at 10.5 percent) and rates on consumer and housing loans increased.

In addition, the weighted average rate on new euro-indexed household loans went down by an average 0.1pp in Q1 to 6.3 percent. At the same, the average interest rate on housing loans stayed almost unchanged owing to the NBS cap on interest rates on housing loans. Conversely, interest rates on consumer loans and on other non-categorised loans decreased, whilst the rate on cash loans increased.

Finally, according to the April 2024 NBS Bank Lending Survey, banks have slightly relaxed credit standards for households driven by positive expectations concerning economic activity. Requirements for dinar cash loans and refinancing loans were relaxed the most, with standards for FX-indexed housing loans also being relaxed somewhat for the first time in seven consecutive quarters. Banks expect household credit standards to ease further in Q2 2024.