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4 Financial system
The reform path calls for a financial system that provides sustainable financing for economic growth built on innovation, knowledge and productivity expansion. In the chapter which discussed income traps, two phases were identified in companies’ life cycle where access to finance continues to be a problem. One is the start-up phase when firms’ assets are insufficient to serve as bank collateral. The survival of innovative, new businesses may be facilitated by an increase in angel investors’ capital investments, and deepening market know-how is also an important objective. The entry of mature companies onto the open capital market would also mitigate the financing problems faced by medium-sized enterprises: huge growth potential can be identified on the capital market with respect to both market capitalisation and the number of listed firms. Smaller enterprises may launch bond issue programmes as an alternative method of obtaining external funds, and using households’ savings may also become a popular and favourable form of investment among households in the future.
Achieving the credit path which supports the economic upswing presented in the third chapter may entail a substantial expansion in the banking system’s outstanding loans (and balance sheet total) relative to GDP. Under the current rules, there is ample leeway for the further expansion of credit. Nonetheless, rapid credit growth occurs in equilibrium only if the real economy expands steadily and in a sustainable manner. The lending boom must affect a larger group of customers, in a sound structure and at the lowest possible cost. If lending rose dynamically without income growth, it would be unsustainable over the long run. The sustainability of the corporate sector’s indebtedness may be ensured by access to credit for a broader range of SMEs on the one hand and investment lending which enhances productivity on the other. In this way, bank lending can improve Hungary’s competitiveness by boosting efficiency and companies’ value added. The guarantee system could also play a major role in increased lending to SMEs, so that even those firms could take out loans that are creditworthy but currently do not comply with most banks’ risk appetite.
The subpillar of the Bank System Competitiveness Index (BSCI) developed in 2017 that captures digitalisation in banking shows shortcomings in the development of digital financial channels in an international comparison. Progress made in this respect may affect all participants in the economy. The level of development and spread of digital banking products also requires that banks’ internal systems and processes be updated, which may entail a gradual decline in the currently high costs-to-assets ratio. Selling banking products via digital channels may also contribute to a supportive credit path, but technological progress requires an accommodative, rational regulatory environment as well.
Alternative sources of financing currently represent a small share of Hungary’s financial system. On the capital market, both market capitalisation and the number of listed firms are below the average of the neighbouring countries. Besides listing, bond issues by non-financial corporations may also be expanded based on international comparisons. Over the long run, increasing the ownership share on the stock and bond market could also raise the value of households’ savings. In the case of start-ups, shortcomings are identified in the knowledge about the market and the legal environment, and with respect to the acquisition of funds, the exposure of angel investors should converge towards the EU average.
