Experts: Banks Stifle Reform

PRAGUE -- High lending margins and strict loan requirements of East European banks threaten to suffocate the region's economic revival, government officials and banking analysts say.


Criticism of the banks rumbled through the halls of a European banking forum held in the Czech capital last week.


At the conference, aimed at improving the banks' role in the transformation of the region, Czech Trade Minister Vladimir Dlouhy was one of many to chide banks for maintaining lending margins as high as 7 percent above interbank rates.


"We desperately need growth to continue the transformation process and I see this very much interconnected with the more flexible behavior of the banking sector, like it or not," Dlouhy said.


Critics complained that bankers in post-Communist Eastern Europe were applying stringent Western lending requirements such as high collateral levels or two- and three-year cash flow forecasts to companies that had little or no capital.


"The point obvious to all of us is that the banking sector does not seem to be as forthcoming in its loan policies in general as it might be," said Russ Trowbridge, economic counselor at the U.S. Embassy in Prague.


"This is a critical issue for the next step in the transformation of those countries that need to move their economies along."


While Western banks usually have lending margins -- the difference between what they pay for funds and the rate customers pay to borrow -- that are only a few basis points (hundredths of a percentage point), Eastern banks tend to have margins of 5 percent or more.


"Czech banks still enjoy lending margins of about 7 percent, while banks in the West still measure lending margins in basis points," said Jiri Huebner, Czech and Slovak team leader at the European Bank for Reconstruction and Development.


Companies in the Czech Republic, for example, are charged between 15 and 18 percent on loans. The Czech discount rate is 8 percent.


In their defense, many bankers said they were being singled out for making money and reminded government officials that they were not benevolent institutions.


"Look, we are a private bank. We cannot perform any social mission in this society. We are given money by one client and we lend it to another. We are not going to waste this money," said Andrzej Wojcik, executive vice president of the Export Development Bank of Warsaw.


Bankers say the high risk of lending money to companies operating in uncertain markets needs to be taken into consideration, although often it is not.


"The 7 percent lending margin is an arithmetic average. If you weighted the margin by risk, you would find they are much less than that," said Stanislav Rudcenko, Vice-President of global research for Bankers Trust.


"The government cannot have it both ways. It cannot ask banks here to lend as much as they can without allowing them to calculate the risk in there somehow."


Dlouhy said he did not expect banks to take on a purely social function but they could do more to help companies structure loans that would be beneficial to both parties.


Governments, he said, were responsible for setting up a framework for the market where banks could operate.


Dlouhy suggested, for example, that an increase in export credits could help companies obtain the funds they needed while limiting risk.


"I just sometimes have the feeling that our banks could do better business if they could find a way to become more flexible," he added.


Banks are not involved enough in longer-term loans, Huebner said, adding: "Most loans in the Czech industry are one-year loans and this can be a problem for a company that is restructuring."