Trends in Lending, Q2 2024

With the aim of better understanding the current situation in the domestic credit market, the National Bank of Serbia (NBS) has published its Q2 2024 Trends in Lending report, which provides 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.

This period was marked by an increase in credit demand (by companies and citizens), eased credit standards and lower interest rates. The moderate decline in interest rates trend, which started at the end of last year, has continued into this quarter (Q). In addition, the share of non-performing loans (NPLs) in the loan total has continued to decline, maintaining the trend that began in 2016, with the adoption and implementation of the NBS strategy for resolving NPLs.

Business Loans

During the second quarter of 2024, business loans measured an increase in the y-o-y growth, amounting to 4.2% in June. In nominal terms, the stock of corporate loans stood at RSD 1,649.00bn in June, and their share in GDP amounted to 19.3%, down by 0.5pp from end-2023, and it demonstrated the result of faster economic activity growth.

At the second quarter, thanks to elevated borrowing in June, business loans increased by RSD 65.9bn, which is the largest quarterly increase in loans since 2008. This increase was entirely due to the borrowing by business entities (RSD 67.7.bn), while public business loans saw a decline.

As per the intended purpose of loans, the growth at the second quarter was led by liquidity and working capital loans (RSD 40.3bn), followed by investment loans (RSD 12.9bn) and borrowing on current accounts (RSD 7.1bn). When we compare the second and first quarter, we see an increase at the second quarter by 0.6pp, to 47.4%, in June in liquidity and working capital loans within the business loan total, while the share of investment loans declined for 0.9pp, to 40.3%. At the same time, liquidity and working capital loans and investment loans accelerated the y-o-y growth to 5.0% and 2.8% respectfully.

As per industry, the highest level of borrowing was recorded within companies operating in energy sectors, trade, construction and manufacturing. As per company size, banks offered loans to micro enterprises, small and medium-sized enterprises rather than to large enterprises (more than half of new loans in the second quarter), which is why the share of loans granted to this segment of enterprises in total business loans in June was 0.6pp higher than in March, and their outstanding amount was 2.6% higher than one year ago.

At the second quarter, the scope of newly approved business loans amounted to RSD 370.4bn, which is 33.3% higher than in the same period of 2023. The most prevalent are liquidity and working capital loans, which comprised 62% of newly approved business loans, where 70% of said loans was approved for the micro enterprises, small and mid-size enterprises. Investment loans comprised a quarter of new loans.

The degree of dinarisation of corporate receivables increased at the second quarter from 17.8% in March to 19.3% in June. The stated increase was brought about by the high utilization of dinar loans.  However, the share of euro-indexed and euro-denominated receivables decreased for 1.6pp, to 82.5% in June, while the share of USD receivables decreased for 0.1%.

The share of NPLs in total business loans amounted to 2.0% in June, and 2.3% just for business loans, which is a decline of 0.3pp and 0.4pp respectively when compared to March. In December, the share of NPLs ranged from 0.5% for the energy sector and from 3.7% for agriculture, where it reached new lowest values for companies in the construction sector (1.5%) and real-estate (0.55%). This demonstrates that the economic support measures during the pandemic were adequate and timely, and that the quality of bank assets was maintained even after their cessation. Additionally, this confirms that the increase in the cost of servicing existing business loans did not result in a rise in NPLs. When compared to July 2015, i.e., immediately before the commencement of the Serbian government’s NPL Resolution Strategy was first implemented, the share of NPLs in the total business loans was lower for 23.0pp, and the most prominent decline of NPLs was noted with the construction sector, real-estate and trade sector.

Interest rates on business loans, both in dinars and euros, continued to record a moderate decline during the second quarter, a trend that started at the end of last year.

The results of the June survey conducted by the NBS regarding the loan activity of banks show that banks continued to ease credit standards for dinar loans to businesses during the second quarter, while simultaneously tightening standards for foreign currency-indexed loans. The maintenance of standards was influenced by lower financing costs, whereas reduced competition in the banking sector, increased risk perception, and, to some extent, the overall economic and geopolitical situation affected the standards for foreign currency-indexed loans.

Household loans

The y-o-y increase in households loans continued its acceleration during the second quarter from 2.7% in March to 4.9% in June. In nominal terms, the outstanding amount of household loans was RSD 1,533.7bn in June, which comprises 47.2% of bank loan claims on the non-monetary sector, i.e., 18.0% of the GDP.

Household loans were increased during the second quarter for RSD 48.3bn, and more than half of that growth was due to cash loans (RSD 26.6bn), followed by mortgages (RSD 13.6bn) and consumer loans (RSD 2.1bn).

In September 2023, the NBS issued a Decision on Temporary Measures for banks concerning mortgages to natural persons, which temporarily capped the interest rate for first mortgage clients, with variable interest rates that were approved before this Decision came into power, and whose contractual amount does not exceed €200,000. These loans temporarily capped the nominal interest rate for the following 15 months, starting with the October installment, and the bank will not have the right to claim the difference in interest from the borrower due to the implementation of this Decision. With this Decision, the NBS reduced the burden on mortgage borrowers amidst rising interest rates, lowered loan installments, increased the disposable income of citizens, and thereby further supported mortgages.

The scope of newly approved household loans in the second quarter of 2024 amounted to 38.1% more than in the same period of 2023. This was primarily due to cash loans, which accounted for just over 2/3 of the new loans. The next in line were mortgages, which accounted for 15% of new household loans, a decline compared to 2022, due to the increase in real-estate prices and borrowing costs.

In the second quarter of 2024, citizens predominantly borrowed in dinars, which led to the dinarisation of household loans reaching nearly 55% in June. At the same time, the share of loans in euros decreased to 45%, while the share of loans in Swiss francs remained unchanged.

The share of NPLs in the total household loans amounted to 4.0% in June, which is 0.3% lower compared to March, with the reduction observed across all categories of household loans. The NPL indicators, which remain close to their lowest levels, indicate that the measures taken by the NBS and the Serbian Government were timely and contributed to avoiding greater negative impacts from the crises we have faced over the past three years on the creditworthiness of citizens.

Finally, according to the results of the July survey on credit activity conducted by the NBS, banks, as expected, eased credit standards for households due to lower funding costs for loans and the effects of competition. According to the banks’ expectations, these same factors, along with positive expectations regarding economic activity, are expected to further ease credit standards in the third quarter.