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SOFIA (Reuters) - Bulgaria's central bank is considering measures to reduce the level of non-performing loans (NPL) that have been falling but still weigh down the Balkan nation's well-capitalized banking industry, Governor Dimitar Radev said on Wednesday.
Bulgaria's financial system has steadied since the collapse of its fourth largest lender in 2014, but bad loans remain a challenge, according to reports by the International Monetary Fund and the European Commission.
Radev was appointed a year after Corporate Commercial Bank collapsed due to fraud and insider abuse, triggering the biggest financial turmoil in the European Union member since the 1990s.
An asset quality review and stress tests last year, which the central bank carried out to restore trust in the industry, had helped banks better assess credit risks and limit bad loans, the governor told Reuters.
"We will create the right incentives to cut the NPLs, the banks will have to do that," Radev said in an interview.
The NPL ratio eased to 13.2 percent at the end of 2016 from 14.6 percent at the end of 2015. By the end of March, it had fallen further to 12.6 percent. But that is still well above an EU average of about 5.5 percent.
"There is a clear downward trend in the past year. I do believe that we will consolidate the trend to generally safe levels," he said, without giving a timeline.
The central bank was preparing regulatory steps and guidance to strengthen loan-loss provisions, increase NPL write offs and encourage more conservative loan and collateral valuation, Radev said, adding provisions and capital were adequate to cover NPLs.
He said the bank would support development of a secondary market for bad loans and would enforce more transparency.
Central bank health checks on lenders in August showed the banking sector was well capitalized and liquid, but pointed to vulnerabilities at some domestic lenders, including Bulgaria's third largest bank, First Investment Bank (Fibank).
Fibank 5F4.BB has said it has met a central bank recommendation to boost capital by about 206 million levs ($118.39 million). It also announced plans to seek new core investors among other options to raise new capital.
"The banks are implementing the measures we prescribed. In fact, their capital enhancement plans are well-advanced," Radev said. "We fully use instruments under our control to keep up the momentum."
The central bank forecast economic growth of 3.0 percent for this year, but Radev said this could be adjusted higher next month, given a pick up in domestic demand and exports.
He said the central bank was supporting Bulgaria's efforts to adopt the euro after the country joined the EU 10 years ago. Bulgaria, whose lev is pegged to the euro in a currency board regime, has yet to set a date for joining.
While Bulgaria meets most formal entry criteria on keeping stable public finances, Western diplomats and bankers say it needs to align its economy and living standards more closely to its wealthier EU peers before applying. [L8N1IQ47G]
"The central bank is delivering on its mandate, it means maintaining price stability and stability of the currency board. Without the stability the remaining steps (towards the euro zone) would not be very productive," Radev said.
Editing by Radu Marinas and Edmund Blair