New Regulations to Affect Bank Lending to Individuals

de     The Romanian Digest
Marţi, 4 octombrie 2005, 0:00


Introduction
The National Bank of Romania recently issued new regulations regulating bank lending to individuals, and placed restrictions on foreign currency lending that will have a direct effect on the population’s financial plans.

As a result, the NBR faces sharp criticism from that nation’s commercial banks, as well as from the most affected party – the Romanian consumer, who now must face some tough times.

Loans to Individuals
The new regulations from the National Bank of Romania came into force on August 29th as NBR Norm No. 10/2005, regarding limiting credit risk for the credits intended for natural persons. Such credits are divided by the law into consumer credits and real property credits.

Consumers who had been waiting to finalize their loans were informed on that date that the criteria used to determine their eligibility for a loan had changed and that they had to present supplementary guarantees in order to obtain the requested financing.

Frustrated consumers discovered that new rules concerning loans for the purchase goods require them to submit either real or personal guarantees, or pay an advance of a minimum 25% of the goods’ value.

If the consumer loan is for something other than consumer goods, the credit applicant is now required to submit real or personal guarantees for the full value of the credit. A loan for the purchase of real property cannot be for more than 75% of the property’s value, and real or personal guarantees are compulsory. The value of the guarantees must be at least 133% of the loan amount.

If the guarantee is a personal one, the lender must determine the financial health of the person offered as guarantor in accordance with the internal regulations of the lender. Another major limitation on such loans is that the monthly amount of the total of the applicant’s liabilities must be 40% or less of the debtor’s monthly net income.

NBR Norm No. 10/2005 establishes the list of documents that must be presented by the credit applicant and, also, sets forth the provisions to be included in the internal regulations of the banks. The credit is granted on the basis of a report on the credit applicant’s situation – drafted and signed in accordance with the bank’s internal regulations.

Also, the debtor must present to the lender documents attesting to the accomplishment of the purpose of the loan such as sale-purchase contract, invoice, or receipt.

Restrictions of Foreign Currency Lending
There are new measures designed to discourage foreign currency lending by increasing the mandatory reserves of commercial banks held in NBR accounts related to such credits. Circular No.

24/2005 applies an increased rate for minimum compulsory reserves of 30% for those foreign currency credits having their maturity at over 2 years and that do not include contractual provisions regarding anticipated refunding, withdrawal or transfer. Most of the credits are of this nature. The previous such rate was 0%.

In addition to such current changes, there is speculation in the Romanian press that the NBR intends to further restrict foreign currency lending by further increases in the rate for minimum reserves to 40% of foreign currency resources.

Also, Regulation No.8/2005 establishes new terms for financial performance categories, quoted as from A to E in a descending order of quality. An individual credit applicant may be classified as an "A" risk only if that person’s income is earned in the same currency as the currency of the loan, meaning that, for instance, a euro loan requires that the applicant receive his income in euros.

Moreover, such income must be of a sufficient amount as to allow the refunding of each rate (principal and interest), after the discharge of all financial obligations. Otherwise, the financial performance will be framed in the B category or less.

In addition to such restrictions, Norm No. 11/2005 requires banks to limit their exposures for foreign currency credits to no more than 300% of the bank’s "own funds" (for Romanian credit institutions) or 300% of the bank’s "initial capital" (for branches of foreign credit institutions).
The bank’s exposure means the global value of such bank’s overall foreign currency credits, while the bank’s "own funds" and its "initial capital" are determined by Norm No. 11/ 2003. As most of the banks have already passed such imposed level, they are compelled to cease providing foreign currency credits. Many will need a capital increase in order to overcome such severe conditions.

These measures are applicable not only to lending to individuals, but also to corporate lending.

A Short History of Greed
One major factor for the issuance of the NBR’s rather severe regulations was the negative effect upon the Romanian economy of the loose credit requirements of Romanian retailers that were used by them in order to induce increased sales.

One by one, documentary requirements were eliminated by the retailers until none of them were obligatory, except for an identity card, that could readily be produced by any consumer. On the principle ‘you exist, you’re over eighteen, you can buy whatever you like’, merchandisers managed to attract more and more customers; but, in the process, creating a greater and greater volume of bad loans.

Imprudent retailers counted upon banks having the funds to cover such losses. They seemingly concluded that because the annual interest rate on good loans was so high, banks could afford to take the risk with consumers of marginal credit worthiness – in effect, passing this cost onto honest folks who were paying for goods purchased by dead-beats through higher interest rates.

Since the bank’s profit on consumer loans is estimated at 30% annually, even with these bad loans, only the NBR seemed disturbed by the effect of such practices upon the inflation rate.

Commercial Banks Criticize NBR’ s New Regulations
The NBR’s intention to temper inflation by imposing new credit restrictions was criticized by the commercial banks. Some of them have already developed systems to avoid the consequences of the new regulations such as extending the repayment period for up to even ten years. Some of them have also raised the credit limit by, in some cases, 10,000 Euros.

But these short term solutions are unlikely to work since most attempts to restore the old practices that were prevalent before the new regulations will only lead to new norms and new rules, since the NBR is determined to clamp down upon bad lending practices.

In an interview granted to Mediafax, Mr. Mugur Isarescu, the Governor of the National Bank of Romania, stated that " . . . as NBR’s target is the financial stability and the internal stability of prices, the increase of foreign currency lending at over ⅔ of the total value of the lent credits is not anymore a fact we can joke about . .

." The Governor is, no doubt, mindful that the International Monetary Fund has warned Romania about its foreign currency lending rates’ growth reaching nearly 60% of the total value of such lent credits.

Following its inflationary target, the National Bank of Romania has managed to develop a credible system to avoid the growth of the inflation rate. Statistics indicate that in the second quarter of 2005, the inflation rate reached 10%, one point higher than in the first one.

Nevertheless, the management of the most powerful banks in Romania have expressed their misgivings about the efficiency of administrative measures as well as their disappointment regarding the fact that NBR did not approach them in advance of issuing the new regulations to determine their views.

The stipulated administrative measures, in the opinion of some banks, will lead to an increase in the costs for the banks and for bank clients.

While the major retail banks, few in number, announced that new restrictions on foreign currency lending will not affect their resources to carry on such lending, speculations suggest that the Romanian Savings Bank (CEC) may become the leader of that sector, because it has never before provided foreign currency lending.

If CEC would be allowed to provide foreign currency credits, it would be free to fill its exposure for such credits starting from 0% up to 300% of its own funds.

Despite expectations stemming from the new limitation on foreign currency lending, the major retail banks have not announced any significant cut of RON credit interest.

Consequences for Consumers
In the weekend prior to the effective date of the new regulations, people that wanted to buy goods on credit burst into stores to take advantage of the last days in which they could get products on credit with just their identity cards. In spite of their fears, however, consumer credit will not disappear, although the use of just an identity card to obtain consumer credit will vanish.

Applicants will now need to provide evidence in support of a credit application once again. While the down payment will be at least 25% of the value of the item purchased, this does not apply if the bank with which the retailer works is situated outside of Romania. Consequently, some retailers will still offer easy credit.

But for the moment, because of the multiple credit restrictions on consumers with more than 40% of their monthly payments due on loans, most people with a mortgage can say goodbye to any hope of obtaining consumer retail credits.

The threat that foreign currency could be banished this year drove many people to the banks at the last moment in the hope that they might still benefit from the old regulations, but what happens to the consumers who didn’t make it in time? Will they still get a consumer loan? From all the banks that provide foreign currency loans, only BCR still has the possibility to give such foreign currency

credits and still respect the limitation of 300% of the bank’s own funds, but there’s no certainty that it could cover the demand. Foreign currency credits may soon become a "luxury" even for the banks themselves.

On the other hand, consumers are concerned that banks will raise their interest rates for RON credits because of this drastic limitation on foreign credits, just to cover their losses. Interest rates grew around 17-19%, which is higher than the euro credit and this didn’t change even when NBR announced that it would not absorb the surplus of liquidity on the market.

So it is hard to see how banks will keep interest rates down. Indeed, most people seem more and more convinced of their growth.

As stated by Regulation No. 8/2005, there is only one category of individuals that could safety afford foreign currency credits: the so called "naturally covered from the currency risk," represented by persons that earn their income in the very currency in which they take credits, meaning in foreign currency. These people will easily bear the new regulations.

Conclusion
The party most affected by the new regulations is the Romanian consumer.

He no longer has the benefits of easy credit by merely displaying his identity card, he has to gather up his family to guarantee a real estate loan, he no longer has access to more expensive credit rates if he doesn’t earn enough money to support a loan and, above all, he is threatened by a growth of the RON credit interest rates.

What can he do now? A good idea would be to postpone his plans and hope for stabilization soon. The NBR hopes that the norms will have a positive effect upon the inflation rate that Romania is trying to reduce.

But their effect also means that young people who wish to purchase a home or furnish it according to their dreams will need their parents, and maybe even other relatives, to financially provide additional support to meet their expectations.

The article "New Regulations to Affect Bank Lending to Individuals" was published based upon approval of:
Rubin Meyer Doru & Trandafir
SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION
IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.
http://www.hr.ro

















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