The rise in overdue loans could prompt banks to set up higher provisions in the second half of the year with prudence in mind, but if provisions rise beyond a certain level, they can hurt banks' solvency, says Serban Toader, senior partner at KPMG Romania.

"In the first six months of the year, provisions increased significantly and are expected to continue this rise in the next six months. This is explained through a major accounting principle, the prudence principle. This primarily affects profitability, but if provisions rise above a certain level - for instance to 10-15% of the loan portfolio - it could also affect certain banks' solvency," Toader told ZF in an interview.

Now, overdue loans account for around 6% of the loan portfolio. Under the circumstances, the rise in the minimum solvency ratio - which measures capital adequacy to risk - from 8% to 10% is a good decision, according to the KPMG representative. Midway through the year, the solvency ratio was at a comfortable 13.5%.

The value of provisions set up by banks rose by 49% in the first half of the year, to 11.3 billion RON from 7.59 billion RON in December 2008, amid a rapid rise in delinquent and in doubtful loans. The major shock occurred in the first quarter of the year, when booming provisions generated 50 million-euro losses for banks. Six months into the year, the banking system reported a meagre 90 million-euro profit.

Toader says banks have brought lending to a level that makes sense in the current economic context, after the lax strategies pursued in the past, and have brought provisioning policies to the appropriate standard, with credit institutions now fighting over good payers. "At individual level, the banks' approach is generally a reasonable one as far as lending is concerned. There is, however, a suspicion, that individual behaviour could ultimately have an unfa