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BNR: December 2017 Financial Stability Report
The ratio of non-performing individual loans would increase from a current 5.8 percent to 7.3 percent in a one-year time horizon under a worst-case scenario of a 200- basis- point increase in interest rates, according to the December 2017 Financial Stability Report released by the National Bank of Romania (BNR) on Monday.
"Preliminary estimates show that the ratio of non-performing individual loans would increase from a current 5.8 percent to 7.3 percent over a one-year horizon under a worst-case scenario of an increase in the interest rates by 200 basis points. Under such circumstances, debtors should be permanently informed of the risks they may face in the medium run to prevent indebtedness where they may subsequently face problems in repaying their financial debts. Thus, debtors would be better protected in the medium run if they required more loan agreements on fixed interest," the report says.
According to the document, most mortgage debtors would experience a potential interest rate shock in real time. Interest on 95 percent of the newly granted mortgage loans is variable, while interest on 58 percent of personal loans granted January-September 2017 is fixed.
According to BNR, the interest rate risk is more pronounced in the case of mortgages, relative to personal loans, due to their longer maturities (up to 30 years versus 5 years on average) at much higher values. At the same time, the interest shock that borrowers whose interest rate has been fixed for the first five years of the repayment may be more significant when fixed interest on mortgages changes into variable interest (5-year fixed interest mortgages make up 3 percent of new loans, January to September 2017).
The report also states that borrowers are exposed to macroeconomic risks as personal income declines. Under the present circumstances, a 6-percent decrease in the income of indebted persons may lead to an increase in the indebtedness by up to 2 percentage points. Moreover, this impact may lead to the materialisation of a significant failure in time, as could be seen in the case of indebted public administration employees, who had to put up with 25-percent wage cuts in July 2010, amidst an economic crisis.
"Given that the rise in household indebtedness may be a vulnerability in financial stability, with potentially significant negative effects on both the financial system and future economic growth, the National Macro-prudential Supervisory Committee issued a recommendation in October 2017 to the Ministry of Public Finance and the National Bank of Romania to form a working group to deepen this subject, in view of possible future action to contain excessive household indebtedness," the report says.