STA, 9 October 2019 - After issuing a set of recommendations last November to warn against imprudent consumer lending practices, Banka Slovenije moved from recommendations to formal restrictions on Wednesday while also further stiffening conditions. "This is also to let the public know where the limits of healthy borrowing lie," Deputy Governor Primož Dolenc said.
The restrictions, which will become effective in November, include maximum 84-month maturity for consumer loans, down from 120 months recommended last year.
Banks will moreover for the most part have to keep loan-to-value ratios (loan payments relative to the client's annual income) to below 50% for clients with monthly income of up to twice the gross minimum wage and below 67% for those making more than that.
What is more, the borrower will have to be left with at least 76% of the gross minimum wage after paying the monthly instalment or more if they have a dependant family member, the head of the central bank's department for financial stability and macro-prudential policy, Tomaž Košak, told the press.
The same loan-to-value ratios will also become obligatory for housing loans. Remaining only a recommendation to banks is that the ratio between the value of a loan and the value of the housing assets used to insure it should not exceed 80%.
Notably, certain derogations will also apply. Up to 15% of the newly granted consumer loans will be allowed to have a maturity of up to 120 months, and up to 10% of consumer as well as housing loans will not be constricted by the loan-to-value ratio pertaining to annual income.
Explaining the decision, Dolenc said the central bank had established that the risks related to these loans were not decreasing despite the recommendations issued last November.
"The annual growth rates remain high, in double-digit territory," Dolenc said, while Košak noted that the average value of a consumer loan increased by EUR 2,000 and stands at EUR 8,000.
The decision to move from recommendations to binding restrictions came as Banka Slovenije discovered that almost a quarter of the total value of loans approved digressed from the recommendations.
Dolenc said credit growth in Slovenia was comparable to the average in the eurozone, but he warned that it was distributed unequally among the segments.
It has stabilised at 5% for housing loans in recent years, which the deputy governor labelled sustainable and appropriate, growth in loans to companies remains under 5%, meaning low but stable, while it stood at a very high 11.7% in August year-on-year for consumer loans to amount to EUR 2.9 billion.
Dolenc said the goal is to keep the growth of these loans on a par with trends in other areas. GDP growth is at roughly 3%, unemployment is at a historic low with a negative turn expected sooner or later, while double-digit growth is recorded for consumer loans along with the trend of ever longer maturity. "The problem is not people's debt levels, but the trend in this field," he added.
The measures will negatively affect the profitability of banks in the short-term, but the central bank expects the long-term effect to be positive for banks as well.
Meanwhile, the measures were rejected today the Slovenian Bank Association as too restrictive, arguing they "could hurt the socially most vulnerable segments of the population and cause major economic damage".
The association claims the new measures will encourage these segments to seek loans outside of the regulated banking system and face unfavourable credit conditions along with problematic loan recovery methods.
It highlighted the regular loan repayment habits of people in Slovenia, who are moreover among the least indebted in Europe while also having a lot of savings.
Also, comparable restrictive measures have only been adopted by three EU member states, the association said in a press release.
It called for a structured, professional and broad debate on the actual effects of the announced measures on individual segments of the population and on the economy, stressing economic growth was increasing based on private consumption, so the measures could have an extremely pro-cyclical effect.