Banks Asked to Limit Consumer Lending to Reduce Risk

By , 06 Nov 2018, 11:50 AM Business
The party could soon be over The party could soon be over Bruce Mars CC-by-0

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STA, 5 November 2018 - The central bank has recommended that retail banks impose stricter conditions on consumer loans, arguing that at the current pace of lending consumers could face problems paying back their loans if the economy turns sour.

In a macroprudential recommendation issued on Monday, Banka Slovenije said risks remained moderate and manageable, but consumer loans had been growing at a brisk pace for an extended period of time.

The pace of lending has been driven by factors including low interest rates, high bank capitalisation, low household debt and high employment.

While these trends are expected to continue driving high demand, loan maturity has been extending, often beyond the useful life of consumer goods that households are purchasing.

Banks in Slovenia told to reduce loan-to-value ratios

"Long maturity means that these loans will remain on bank balance sheets when the economic cycle turns, which, if macroeconomic risks materialise, may quickly lead to problems in the payment of these loans," the central bank warns.

Banks are therefore advised to keep loan-to-value ratios (loan payments relative to the client's annual income) to below 50% for persons with monthly income of up to EUR 1,700 and below 67% for those making more than that.

The central bank also recommends that new consumer loans should have maturities below 120 months.

The decision was reached "to prevent a loosening of lending standards and improving banks' resilience."

Formally, the new macroprudential recommendation is an expansion of the measure from late-2016, when the central bank advised banks to start reigning in mortgages. That recommendation remains in place.

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