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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2005 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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