UPDATE 2-Croatia's c.bank cuts reserve rate to 12 from 13.5 pct to spur lending
* Mandatory reserve rate cut to 12 from 13.5 pct
* Lombard rate cut to 5 from 6.25 pct
* Croatia had five years without growth
* Bad loans surpass 15 pct of total lending (Adds details, analyst comment)
By Igor Ilic
ZAGREB, Nov 28 (Reuters) - Croatia's central bank cut the mandatory reserve rate for banks to 12 percent on Thursday from 13.5 percent in an effort to spur corporate lending and revive the new European Union member's battered economy.
Governor Boris Vujcic confirmed the rate cut to reporters after a central bank board meeting. He said the central bank had also cut the Lombard rate, at which commercial lenders take short-term loans from the bank, to 5 from 6.25 percent.
The money freed from the reserves, amounting to 3.9 billion kuna ($693 million), will come with conditions attached, meaning the banks will be able to use it exclusively for lending to local firms that put forward viable projects.
The banks will first, using those funds, have to buy mandatory and non-transferable central bank bills on Dec. 11 whose maturity will be three years.
"The bank will buy back those bills also before the maturity date depending on a rise in lending to domestic non-financial firms. The bills are interest-free which means it should motivate banks to extend loans. The bills are a tool to control where the freed funds will go to," Vujcic said.
Despite good liquidity in local banks, most of them foreign-owned, lending in Croatia has been subdued in recent years amid dwindling living standards and deleveraging of local firms, after a credit boom in 2003-2008. Also, a risk aversion among banks considerably grew.
The central bank will not determine the interest rates at which the banks would give credit the economy, but said they could be lower than their current levels. The current average interest rate on loans extended to local firms is a bit over six percent.
Analysts welcomed the monetary policy effort, but said it was too early to assess how strongly it could affect credit issuance.
"This brings down regulatory costs and provides sufficient liquidity, but what we have yet to see is how strong demand will be and how the banks will be assessing the lending risks," Alen Kovac from Erste Bank said.
The level of bad loans has surpassed 15 percent of overall loans and every fourth corporate loan is classified as non-performing.
Croatia has lost around 11 percent of its output since 2008 and the government hopes for growth of 1.3 percent next year driven primarily by public sector investments and EU development funds.
($1 = 5.6291 Croatian kunas) (Reporting by Igor Ilic; Editing by Toby Chopra)
- Malaysia jet sent 'pings' after going missing, sources say |
- Russia holds war games near Ukraine; Merkel warns of catastrophe |
- Rescuers search site of NY building collapse; seven dead |
- White House tried to mediate dispute between Senate, CIA panel: source
- Missing jet may have strayed to west, Malaysia military says |