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Business Insight: Bulgarians Take to Life on Credit

06 09 2007  Credit boom bolstered by bank deregulation, easier loans, rise in real estate prices and growing confidence on overall economic outlook.

By Nikolay Petrov in Sofia

Bulgarians are on a shopping spree, buying homes, cars, home cinema and household appliances on credit and loans that were far from accessible until the turn of the millennium.

Recent statistics from the Bulgarian National Bank indicate mortgage loans rose by 78 per cent for the first half of 2007 alone, after a similar 74-per-cent rise in 2006 compared to 2005.

The credit boom started a few years before Bulgaria joined the European Union on January 1, 2007, as banks switched from traditional credit operations to less regulated and sometimes exotic lending schemes.

Banks have cut interest rates as a result from an average of 10.5 per cent in 2003 to less than 7 per cent today. Bulgaria’s accession to the EU only boosted the trend.

A typical mortgage loan of 38,000 euros, therefore, now requires a monthly repayment of some BGN 500 (250 euros), down from around BGN 700 (350 euros) four or five years ago.

In a country where monthly salaries average only about 200 euros - amongst the lowest in Europe - these offers are a significant incentive.

Officially, banks are supposed to insist on certain criteria when studying mortgage applications, requiring clients to show their projected monthly repayments will be less than 60 per cent of their monthly income.

However, families are paying up to 70 per cent of their declared earnings these days and a frequently aired commercial makes it clear at least one bank does not require any data on a client’s personal income, as it is interested only in the price of the property.

According to official statistics, the average combined household income in Bulgaria is around BGN 614 (315 euros), a figure that has risen by less than 10 per cent on an annual basis.

Some 59 per cent of all consumer credits are now being obtained by households earning less than BGN 1,000 (510 euros) per month and a substantial 29 per cent went to households earning less than 250 euros per month.

IT specialists, pharmacists and civil servants top the list of borrowers, while members of the medical profession, teachers and journalists are at the bottom. The share of Bulgarians, who have found jobs or who are permanently living abroad, in the overall credit portfolio of the banks is on the rise.

Some recent growth in loans can be attributed to clients borrowing money to refinance older credits obtained at higher interest rates, or to pay the initial amount required for financial leasing schemes. This portion of new loans stood at 24 per cent in 2006 and will remain at a similar level in 2007.

The steep rise in credits has obviously not exhausted its growth potential. As a precautionary measure, as of September 1, the Bulgarian National Bank, BNB, raised the level of compulsory provisions – the so-called “sleeping money” - that the commercial banks will have to keep in interest-free deposits with the central bank from 8 to 12 per cent.

Several banks duly responded by raising interest rates on credits by an average of 1 per cent. But these small rises in interest rates are not expected to slow the overall expansion in credit provision.

Banks are constantly coming up with new bonuses to tempt fresh clients in to the field. These include cuts in debt servicing fees and longer repayment schedules of up to 35 years for some mortgage loans. Banks are increasingly ready to finance 100 per cent of the price of clients’ property purchases as well.

Most banks have also set up their own leasing and mortgage operations to provide a better mix of options to clients.

Besides, surveys show about 50 per cent of Bulgarians have yet to obtain any form of loan, there is still a vast pool to tap.

The more aggressive market stance of the lending community matches the fact that many Bulgarians have clearly shed their traditional psychological reluctance to assume long-term financial commitments.

People increasingly want to settle personal or household needs now, not in the distant future. This reflects a general realization that, in terms of longer-term stability, the economic situation in Bulgaria has become more predictable.

The growth in savings in Bulgarian banks, now worth at BGN 15.6 billion (close to 8 billion euros) is a fair match for credits expansion as deposits are often used as collateral on loans. A token 14 per cent of the deposits are managed by collective investments schemes or are invested in stock.

But in terms of long-term personal finance strategies a mortgage loan, regardless of its price, remains a much better option for future gains, given the expected rise in real estate prices.

Nikolay Petrov is an editor with the Foreign News desk at the Bulgarian News Agency, BTA and Balkan Insight contributor.