OREANDA-NEWS. The growth of impaired loans is declining at Central and Eastern European (CEE) banks but shifting these loans off-balance sheet is progressing slowly, says Fitch Ratings.

The ratio of impaired loans to total loans was particularly high in Bulgaria (20%), Slovenia (17%), Romania and Hungary (both about 13%) as at end-1H15. Legacy bad loans are material even in the better performing countries of Poland, Czech Republic and Slovakia.

Faster clean-up of portfolios is a prerequisite for lending growth in markets with high stock of legacy bad debts.

Procedures for writing off impaired loans are cumbersome in many CEE countries. In most cases, banks need to prove that recovery is impossible before tax-efficient write-offs can be made. But legal systems tend to be slow and banks might have to wait three to five years before court procedures are concluded.

Regulation is helping to drive the reduction of impaired loan stocks in some countries. Hungarian banks will have to assign additional systemic risk buffers to their impaired project loans from 2017, forcing them to accelerate portfolio cleaning or to hold additional capital.

Bank regulators in Romania and Slovenia introduced measures to reduce impaired loans in 2013 and 2014. There was more progress in Romania, where impaired loans ratio halved, but the stock of impaired loans remains high in both countries. Private sector initiatives, such as selling impaired loans to special recovery funds and vehicles, more popular in Poland, can also be slow because few such companies operate in the region. Tax treatment of the sale transactions is also unclear in some countries.

Fitch Ratings think the ability to write off impaired loans more effectively would free up balance sheets, allowing banks to extend credit and support the real economy. It would also free up management, allowing time to focus on broader strategic issues. A significant reduction in the impaired loan overhang could also be positive for the standalone Viability Ratings of some banks.