Municipal lending in Hungary : background paper

Although levels of municipal investment are relatively low, loans represent only 10-15 percent of capital expenditures. Several factors have dampened the local decision to borrow. On the financial sector side, considerable nonperforming loan portfolios, central government deficit refinancing requirements, and the short-term nature of most deposits have limited capital available to local governments. The National Savings Bank (OTP) holds almost all local governments accounts and handles the great majority of municipal lending. Nevertheless, several of the largest Hungarian banks have indicated interest in or are already pursuing a strategy of attracting local government business. Although local governments are perceived as an attractive market, some considerations have delayed the entry of banks, including the OTP"s advantageous market position. USAID proposes technical assistance to banks and to municipalities to strengthen infrastructure finance capacities; in addition, it recommends renovation of central government investment subsidy system and improvement in the financial oversight of local governments. (Author abstract)