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ZAGREB, March 12 (Reuters) - Lending by Croatia's state-owned bank HBOR fell by almost 25 percent in 2013 as many local firms in the newest European Union state struggled with debts, its chief executive said on Wednesday.
However, net profit soared thanks to lower interest rate payments to its creditors, Anton Kovacev said.
HBOR's 2013 net profit rose 41 percent year-on-year to 189.2 million kuna ($34.3 million). The bank extended loans worth 7.8 billion kuna in 2013 compared to 10.2 billion kuna a year before, while its overall assets rose by two percent in 2013 to 26.2 billion kuna.
"The fall in crediting activity is mostly due to lower demand for liquidity loans, while a considerable number of local companies are in a pre-bankruptcy settlement procedure, which reduces the overall demand for loans," Kovacev said.
The pre-bankruptcy settlement was devised by the current government to help indebted companies strike a deal with creditors and sustain healthy business instead of going bust. In such settlements, part of the debt is written off.
There is plenty of liquidity in the local banking sector, 90 percent of which is in foreign hands, but local firms complain that high risk aversion and unfavourable interest rates deter borrowing.
Croatia has suffered five recession years in a row, shedding more than 12 percent of economic output since 2008. Analysts blame slow progress in tackling red tape, inflexible labour rules, a high tax bite and excessive public spending.
This year the government projects growth of 0.2 percent, while most analysts, including the International Monetary Fund, see another contraction of up to one percent.
HBOR offers investment loans at interest rates ranging from two to five percent, while the average level of local long-term corporate loans is slightly over six percent.
HBOR said it had initiated talks with local banks, pension funds and international financial institutions on creating a local development-investment fund worth between one and two billion kuna.
"Companies that successfully complete a pre-bankruptcy settlement cannot easily get a loan from commercial banks, so this would be a way to help their business and economic growth," Kovacev said. ($1 = 5.5224 Croatian Kunas) (Reporting by Igor Ilic; Editing by Zoran Radosavljevic/Ruth Pitchford)