Loans to households: a boom to hold in check

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

The rapid expansion of bank loans to individuals in Central and Eastern Europe has supported household consumption and economic growth, as well as continued development of the banking sector.

In the CEEC, the rapid expansion of bank loans to individuals in 2001 and 2002 was a factor which supported household consumption, and thus economic growth. Within a context of decelerating investment and therefore loans to businesses, this recent trend has enabled the banking sector to continue its development.

Loans to private individuals are still in their infancy but growing quickly.

In countries where the level of wealth per capita is low compared to that in the European Union, the strong growth in bank lending is a sign of change in consumer behaviour and convergence in spending habits. This rise is also explained by the very low initial level of bank overdrafts granted to firms as well as to private individuals.

Loans to households, in particular, lag behind and are, as a % of GDP, seven times lower (on average) than in the EU. Except for Hungary and Poland, the home loan sector, which includes loans for home improvement, is widely dominant. Over the last two years in all the CEEC except Slovenia (and Slovakia in 2001), loans to households showed a two-digit increase. In 2002, home loans doubled in Latvia, Lithuania and Hungary where households experienced very strong wage rises. A property bubble appeared in Tallinn and Riga.

Significant development in loans to households may be expected but this should be accompanied by a better risk assessment.

Taking into account the prospects for an improvement in the standard of living but also the transfers of money from the EU which the enlargement process is expected to bring, the household share of the banking market is almost assured of a strong medium-term increase. As illustrated by the partnership of Carrefour/Cetelem in the Czech Republic and CreditGen/Cora in Hungary, the presence of many supermarkets stimulates both the appetite for consumption and the use of the credit card. In addition, even though the percentage of home-owners is sometimes large (85% in Hungary and Slovenia, and approximately 80% in Poland, as against 55% in France), the need for home improvements, in particular, may fuel housing loans still further.

However, the lack of customer track records and credit history makes risk management more difficult than in the EU. The situation should improve, thanks to the creation of databases which collect information on bad debtors: one is in the course of being set up in the Czech Republic and another is being improved in Poland. Home loans are generally secured on good property and granted to customers who are relatively well off; but this is less true of consumer credit. Debt recovery is also a problem for the banks as the legal procedures are considered to be too long and not very effective; thus they often turn to debt collection companies, which adds to the cost of the loan.


For more analyses, see the

enlargement website of DREE.  

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