The National Bank of Serbia (NBS) has published its Q3 2024 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.

The Q3 2024 report draws on the results of the bank lending survey conducted by the NBS since early 2014, which allows insight into bankers’ perception of actual and expected changes with regard to loan supply and private sector loan demand. The Trends in Lending report also relies on the results of the survey developed by the European Investment Bank in the context of Vienna Initiative 2 to monitor deleveraging by cross-border banking groups and the resultant constraints on lending activity.

Year-on-year (y-o-y) growth in total domestic loans, excluding the exchange rate effect, accelerated further to 6.6 percent in September thanks to softened credit standards and lower funding costs. Corporate loans sped up to 5.0 percent y-o-y and household loans to 7.8 percent.

Total domestic bank receivables from the non-monetary sector picked up y-o-y to a similar extent as domestic loans, to 6.9 percent in September.

Corporate loans, excluding the exchange rate effect, rose by 1.9 percent or RSD 32.2 bn in Q3, with more than three-fifths of the increase referring to dinar loans.

Continued Q3 growth in dinar loans has received additional impetus from the new rules set out in the NBS’s Bank Capital Adequacy Decision. According to these, starting in 2025, when assessing their capital adequacy ratios banks will be required to reduce their capital if their share of FX-indexed and FX loans in total loans approved to the non-financial and non-governmental sector after 1 July 2023 exceeds a specific threshold 71 percent in 2025, with the figure to be reduced to 64 percent in 2026.

Company borrowing expanded across most sectors, particularly in transport and manufacturing. Liquidity and working capital loans remained dominant, followed by investment loans. At the same time, there was a decline in import loans, current accounts and other non-categorised loans.

As a result, the share of liquidity and working capital loans in total corporate loans climbed by 0.4 pp in Q3 to 47.8 percent in September, and the share of investment loans by 0.2 pp to 40.6 percent.

Throughout the quarter, banks lent to large enterprises the most, and as a result, the share of loans approved to micro, small and medium-sized enterprises in total corporate loans shrank to 58.7 percent in September from 59.3 percent in June, though their stock was 5.6 percent higher y-o-y and 0.9 percent higher quarter-on-quarter (q-o-q). In addition, the volume of new corporate loans measured RSD 339.1 bn in Q3, up by 12.3 percent y-o-y.

As dinar receivables increased more than FX-indexed ones, the degree of dinarisation of corporate receivables increased.

The share of non-performing loans (NPLs) in total corporate loans continued down in Q3, measuring 1.8 percent in September, and 2 percent for loans to companies only, a decrease of 0.2 pp and 0.3 pp, respectively, from June 2024.

Key factors contributing to the sharp fall in NPLs from 2016 onwards were the implementation of the NPL Resolution Strategy and the Decision on the Accounting Write-Off of Bank Balance Sheet Assets. Similarly to lending trends recorded in Q2 2024, incentives introduced during the Covid pandemic proved effective, helping greatly to maintain the quality of bank assets in Q3 2024.

Relative to July 2015, i.e. immediately before the NPL Resolution Strategy came into effect, the share of NPLs in total corporate loans has gone down by 23.2 pp, with the most pronounced decrease recorded in construction, real estate, and trade.

In terms of the cost of corporate borrowing, in Q3 2024 the NBS continued to ease monetary conditions cautiously, spurring a further fall in interest rates on dinar loans. Rates on euro-denominated loans also decreased moderately in Q3 due to the start of monetary policy easing by the European Central Bank (ECB).

It ought to be noted that businesses’ demand for dinar and short-term FX-indexed loans expanded in Q3, whereas their appetite for long-term FX-indexed loans declined. Banks expect corporate loan demand to expand in Q4.

Loans to households went up by RSD 48.7 bn in Q3, an increase almost identical to that from Q2. The impetus came from cash loans, which gained RSD 31.7 bn, supported by banks’ promotional offers, lower interest rates and relaxed credit standards.

The temporary NBS cap on interest rates on housing loans has led to these loans accounting for nearly one-third of all new Q3 borrowing (at RSD 15.2 bn), with demand in this segment growing for the third consecutive quarter.

The volume of new household loans amounted to RSD 196.5 bn in Q3, up by 48.6 percent y-o-y.

A total of 72 percent of FX and FX-indexed household loans were linked to EURIBOR, mostly six-month. Around 80 percent of loans were granted at a fixed rate, while most variable rate loans were linked to three-month BELIBOR.

The share of NPLs in total household loans continued down in Q3, dropping to a new historical low in September of 3.7 percent, down 0.2 pp from June and 0.6 pp from end-2023. NPLs decreased across nearly all categories of loans.

According to the October 2024 NBS bank lending survey, banks further relaxed their credit standards for households in Q3, more so than anticipated in the previous survey. Standards were eased for dinar cash loans, refinancing loans and consumer loans, as well as for FX-indexed housing loans.

The relaxation was motivated by lower funding costs, positive expectations regarding economic activity, competition between banks, and a positive outlook in the real estate market.

Interest margins narrowed in Q3 as well, somewhat more for dinar loans, whereas commissions and fees went up. Household loan demand continued up, in particular for dinar cash and refinancing loans, as well as FX-indexed housing and consumer loans.

This rise in demand was driven by the need to refinance outstanding loans and purchase real estates and durable consumer goods, with a positive impetus coming from higher wages.

Overall lending has been increasing, with standards being eased, interest rates moving downward, and banks competing with one another more forcefully. Demand for dinar cash, refinancing, and FX-indexed housing loans continued growing in Q3, with businesses seeing an increase in dianr loans. The share of NPLs has been on the decline, suggesting a stable market, with credit growth expected to continue in the future.