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(Bloomberg) -- Serb banks may inadvertently boost the number of bad loans in the Balkan country if they go ahead with plans to ease pressure on clients with Swiss franc-linked mortgages, the head of the country’s Erste Bank AG’s unit said.

Bankers are considering converting the denomination of franc loans, which account for a third of all housing loans, to euros at no extra charge, cutting interest rates on the loans and extending mortgage repayments, said Slavko Caric, the chief executive officer of Erste Bank AD.

“Any extension of loan repayments after, let’s say, a three-year grace period for interest rate payments carries a risk for borrowers once they start repaying the full debt again,” Caric said in a phone interview on Wednesday from Belgrade. “For banks, any conversion of franc loans to euros or any form of a haircut will mean 100 percent loan provisioning. Some banks cannot afford that.”

Repayments on Swiss-franc mortgages, worth more than $1.1 billion, soared after Switzerland’s central bank lifted a cap on its currency on Jan. 19, boosting its value across Europe. Erste, one of 29 members in the Serbian Bank Association, is awaiting guidance from the central bank, which has pledged to define measures to resolve the problem by the end of this week, central bank Governor Jorgovanka Tabakovic told TV Pink broadcaster on Tuesday.

Average property prices in Serbia have slumped 20 percent to 50 percent since their 2009 peak, while the economy dipped into recession three times during the period.

‘Immeasurable Loss’

The Narodna Banka Srbije won’t fix the dinar against the franc as the loss for banks would be “immeasurable,” Tabakovic said on Jan. 26.

Erste in Serbia is ready to offer clients either a currency conversion or lower interest on franc loans, Caric said. Any difference between incentive and market rates will be paid at a later date.

Hundreds of Serbs hurt by a jump in loan repayments have protested nationwide in the past weeks, demanding some repayment relief. The government has already said it won’t assist them and the central bank is mulling solutions to the latest crisis.

Banks in Serbia, many of which are majority owned by European Union members, have offered to convert the loans to euros. That has sparked opposition from borrowers, who say such a move would further increase their payments while their wages remain unchanged.

Branislav Andonovic, who took out a mortgage seven years ago to buy an apartment in the capital Belgrade, was among 600 protesters who gathered near the central bank on Saturday.

Andonovic said his apartment is worth less than 30,000 euros ($34,317) after the dinar slumped against the franc, and he owes almost 50,000 euros.

He’s ready “to give back the keys to the bank” as he can’t imagine coping with the payments in the future, Andonovic said.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net Andras Gergely

Bloomberg