The reasons why banks are not lending: The 3 "cutters" of credit expansion

Credit expansion remains below expectations and below the momentum of the economy, given that the domestic economy is on track for a strong recovery from 2021.

With the exception of lending to large and medium-sized enterprises, and the financing of large investments, lending to small businesses and self-employed persons remains stuck at low levels, while - even worse - the net flow of financing to households remains negative. Significantly, in 2022, businesses absorbed almost 90% of all new financing. 

This paradox is typically reflected in the real estate market, where prices have been moving strongly upwards for years but mortgages remain in negative territory.

According to the latest available data from the Bank of Greece, last April the annual rate of change in total private sector financing fell to 3.9% from 5.2% in March, as the monthly net flow of financing to businesses and households was negative by EUR 789 million, i.e. new loans were less than the repayments of older loans.

Indeed, in April, the flow to enterprises was also negative (-€582 million), resulting in an annual rate of change of 8.2%, down from 10.3% in March last year. Bank officials note that the fatigue recorded in 2023 and in loans to businesses is also due to the repayments, which many businesses made, having high liquidity and wanting to avoid the burden of rising interest rates.

The three main obstacles

According to bank executives, there are three major obstacles - cutters in the growth of lending and which in the medium term work negatively for the growth of the sector.

• A large proportion of households - businesses remain in the Tiresias. After the unprecedented, peacetime dislocation of the economy in 2010 - 2016, which dragged the banking system into a major crisis, catapulting non-performing loans to the level of 50%, about half of households and half of businesses found themselves with "red" loans and were registered in the Tiresias system. Households, businesses and self-employed persons on the Tiresias list are practically unable to obtain a loan from a bank.
• A large number of small businesses and freelancers still operate outside the formal financial circuit. The black economy and tax evasion are a major scourge for the economy, as a large proportion of small businesses, professionals and freelancers do not declare their true financial data. A few days ago, the Governor of the Bank of Greece, Yannis Stournaras, highlighted the paradox that the income declared in our country is 80 billion but the consumption declared is 140 billion! This is a chronic pathogenesis of the domestic economy, with many side effects, the main one being that it keeps a large number of small businesses on the sidelines. Thus, professionals and freelancers who declare low incomes do not qualify for a loan. The same applies to many micro-enterprises, which systematically show either losses or very low profits. All those who operate in the "black" part of the economy cannot access the banking system. 
• Highly liquid individuals. The high liquidity available to households, which is reflected in the trend in deposits, makes retailers reluctant to seek bank lending.

Bank executives, speaking to Business Daily, acknowledge the above constraints but believe that credit expansion rates can improve in the coming years. They note that, as in the previous two years, new lending this year will be channelled mainly to businesses, investment and infrastructure projects, but gradually the growth of the economy and improving incomes will lead to a second year of growth in loans to households, especially in housing credit.