Budapest: Hungary's central bank proposed regulatory action on Thursday to encourage commercial banks to clean bad corporate loans from their books, saying this should improve their ability to lend and reduce risks to their stability.
In the latest intervention by Hungarian authorities in the local banking system, the bank also announced plans to impose stricter rules this year on household loans, to stop credit growing unhealthily fast as an economic recovery gathers pace.
The central bank has said the banking sector needs a shake-up that could result in several foreign banks leaving, and would make the sector more competitive.
It has already tightened funding rules and announced measures to push commercial banks to buy more local-currency government debt in an attempt to reduce the country's high reliance on foreign financing.
Hungary's mostly foreign-owned banks pay one of Europe's highest bank levies, and were forced to swallow heavy losses on a previous government measure in 2011 to help troubled foreign currency borrowers.
The central bank, which is led by a strong ally of Prime Minister Viktor Orban, his former economy minister Gyorgy Matolcsy, said on Thursday that banks were still not adequately supporting economic growth.
This is partly due to a high stock of non-performing corporate loans in banks loan books, the central bank said in its latest financial stability report. It said banks needed to tackle the problem soon to fend off risks to financial stability and to encourage new lending.
It suggested possible positive and negative incentives to speed up the cleansing of loan books.
For banks, a negative incentive would be the introduction of stricter loan loss provisioning obligations, the stability report said, adding the concept of a bad bank could also be considered as an option.
Balazs Vonnak, a director of the bank, told a news conference that the bank was considering several solutions and would table proposals within a few months.
'this is entirely independent of the consolidation of the banking sector, Vonnak said. 'this is neither an incentive, nor a counter-incentive (for consolidation). This is aimed at preventing a build-up of future risks. The bank said 18 per cent of loans were non-performing at the end of 2013 in the corporate segment, while bad loans in the household portfolio rose to 18.6 per cent.
The bank also said its Financial Stability Council has approved a plan to impose an upper limit on payment-to-income ratios on household loans, which should take effect this year.
It did not say what the limit would be.
Banks operating in the country include units of Belgium's KBC, Austria's Raiffeisen Bank, Erste Bank and Italy's Unicredit.
So far, all the main players have said they intended to stay in Hungary except for German BayernLB, which has to sell its Hungarian unit MKB due to an order from the European Commission to restructure its operations.
Orban's government has repeatedly said it wants to see over 50 per cent of the country's banks in Hungarian hands. At the moment, Hungarian ownership is at around 40 per cent based on total assets.