Romania Financial Sector Assessment
Romania’s financial sector has strengthened significantly over the last few years. Effective supervisory measures have helped reduce the high level of non-performing loans (NPLs) from 21.5 percent at its peak in 2013 to 6.4 percent as of December 2...
| Main Authors: | , |
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| Format: | Report |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/367591532709095860/Romania-Financial-Sector-Assessment http://hdl.handle.net/10986/30221 |
| Summary: | Romania’s financial sector has
strengthened significantly over the last few years.
Effective supervisory measures have helped reduce the high
level of non-performing loans (NPLs) from 21.5 percent at
its peak in 2013 to 6.4 percent as of December 2017.However,
some vulnerabilities are emerging. Banks’ holdings of
domestic sovereign paper have grown large, exposing them to
valuation losses in case of an increase in interest rates or
sovereign risk spreads. Banks’ indirect exposures to
government guarantees through the Prima Casa program further
strengthens the sovereign-bank nexus. An increase in
interest rates may also negatively impact NPL ratios on
banks’ mortgage portfolios, which are growing fast and are
at variable rates. The share of foreign exchange (FX)
denominated loans and deposits significantly decreased, but
remains relatively high, and a large share of corporate
borrowers is unhedged. Finally, lending practices of
non-bank financial lenders (NBFLs) may lead to loan defaults
and reputational risks for the banking sector. As the
financial system is small, shocks may further discourage
financial intermediation, which is already among the lowest
in the European Union (EU). The NBR is transitioning to a
risk-based supervisory approach that needs further
enhancements. The new Supervisory Review and Evaluation
Process (SREP) Guidelines of the European Banking Authority
(EBA) are still in the initial stages of implementation. The
NBR should conduct more risk-focused, banking industry-wide
thematic analyses and develop its off-site monitoring tools,
such as by conducting bottom up stress tests.Financial
intermediation relative to the economy is low and
declining.On the demand side, credit needs remain, overall,
limited due to low enterprise density, poor health of the
enterprise sector, and high number of foreign owned firms
(compared to peers). The economic growth had a positive
spillover in the enterprise sector, but this did not
translate into increased investment activity, despite an
unprecedented low interest rate environment. On the supply
side, the supply of credit has been constrained by several
factors including: i) an acute deterioration of asset
quality, particularly among MSMEs, after the crisis, ii)
banks’ deleveraging pressures, iii) deficiencies in the
credit enabling infrastructures (credit reporting,
insolvency), iv) preference of banks for sovereign debt, as
well as government guaranteed debt in a context of fiscal
expansion, v) lack of depth in the NBFI segment, and vi)
declining use of public partial credit guarantees due to
operational problems. As a result, access to credit is
particularly problematic for certain firm segments that are
underserved by the banking sector, including for micro,
small and medium-sized enterprises (MSMEs), start-ups, the
agriculture sector, and in rural areas.Improving financial
inclusion may require broader solutions including i) a
better use of the Posta Romana network of branches, ii)
measures to enable credit unions to expand and offer more
financial services while strengthening supervision, iii) the
adoption of incentive mechanisms to accelerate the expansion
of digital finance solutions, and iv) the promotion of
financial inclusion and literacy as well as effective
consumer protection mechanisms. |
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