Croatian governor: western Europe could improve NPL provisioning

Boris Vujčić, governor of the Croatian National Bank, believes that too many western European countries have been too slow in increasing the provisioning of their non-performing loans (NPLs).

When Vujčić became governor in 2012, one of his main priorities was increasing the provisioning of Croatia’s NPLs, he says in an interview in the forthcoming issue of Central Banking journal. Croatia then had a high level of NPLs, which were only provisioned at “around 42%”, Vujčić noted.

“I think that we, as central bankers, didn’t have a good view of the worth of collateral,” Vujčić says. “But I didn’t think the banks had a good view of it either.” In response, the central bank introduced the “provisioning clock” in 2013.

Under this measure, commercial banks either had to initiate court proceedings to seize the collateral of an NPL, or increase its provisioning by 5 percentage points every six months. “It worked well,” says Vujčić. The provisioning level of Croatian NPLs rose from “about 42%” in 2012 to approximately 65% now, he said. NPLs were falling as a proportion of banks’ total balance sheets, from about 16% of banks’ balance sheets in 2013 to “perhaps 10% very soon”.

Obliging commercial banks to increase their provisioning of NPLs does not disincentivise future lending, he argues: “I thought provisioning was like taking money from your left pocket and putting it in your right pocket: nobody’s taking money from you.”

Asked if other European countries could increase provisioning, Vujčić replies: “Of course.” He adds that policies to increase the provisioning of NPLs are “mostly being done in central and eastern Europe – much less in western Europe.”