Country updates - ECRC partner ZPS shares recent developments in Slovenia and Ukraine where efforts have been made to promote the messages of responsible credit further East. UKRAINE Retail financial services markets in Ukraine have been paralyzed in the last few months, with few indicators on when the situation will improve. At the moment, the provision of consumer credit has entirely stopped. As in most Central and Eastern European countries, widespread lending in foreign currency was typical in the Ukraine, a practice started by foreign banks, mostly of EU origin. Lending took place mostly in dollars and swiss franks. Altogether, 70% of consumer loans are in foreign currency, while mortgage loan shares are high also. Consumers were lured into foreign currency loans by significantly lower interest rates, sometimes only 50% of the interest rates for loans denominated in national currency. Lending in Ukraine in general has been extremely expensive, with rates such as 15% for a dollar-loan and 25% for a hrivnia-loan being representative costs of borrowing money. There has been no or very deficient information on foreign currency credit risks. The global financial crisis has led to severe imbalances in the Ukrainian economy, the national currency loosing 43% against the dollar since September. The already high burden of credit on the consumers increased radically. On the top of this, one-sided interest rate increases by the banks have been widespread in consumer credit in Ukraine, aggravating further the situation of the consumers. According to different prognoses, between 12 and 25% of consumer loans could go bad in this year. No personal bankruptcy or overindebtedness legislation is in place to protect the interest of the consumers in this situation. Transparency has been a huge problem for Ukranian consumers when entering credit contracts. Only since 2006 have the providers been obliged to inform the consumer on the total amount of loan costs from the credit and set the number in the contracts, while the specifications on the loan amortization disclosure have also been week. In 2007, the Ukranian Central Bank has tightened the regulation by also requesting the use of the APR in info-materials and contracts. A smaller screening of the market, performed within a UNDP/EU project on strengthening the civil society in the Ukraine, has shown that the APR is only disclosed by 1 in 10 banks in bank information materials, while it was not disclosed in any of the reviewed credit contracts. As a result, the consumers are not aware of the costs they are facing when entering credit contracts and even less able to compare the offers. In addition to credit problems, a bank-run has happened in the Ukraine after serious problems in one of the largest banks, resulting in the deposits being frozen for at least 1 year. Consumers can only access these in some cases if they abstain from up to 50% of the saved amount. It is difficult to say when the situation on the market will improve, but it will certainly take years before the consumer confidence can be re-built. Conditions for this are further improvements in the legislation (p.e. no one-sided discretion for changing credit interest) and especially regulation of the banking and non-bank credit/deposits sector. SLOVENIA One of the biggest problems the Slovene consumers are facing at the moment in the field of credit are high interest rates for new credit despite the fall of reference interest rates (EURIBOR, LIBOR) in the last months and numerous governmental measures to support the banks and cheapen their re-financing. In variable-interest credit, the fixed surpluses on the reference interest rates applied are up to 3 times higher than they used to be only a year ago. Such pricing politics cannot be explained solely by the banks’ reaction to the uncertainties on the market. Apparently the existing and potential losses from risky and badly secured loans to companies (very widespread in Slovenia) are being covered by expensive services for the consumers. The disequilibriums in the financial markets have burdened households with foreign currency loans in the last months (11% in existing consumer loans, 29% in mortgage loans) as in other New Member States. The result of these uncertainties has however been a sharp decrease in the demand for swiss frank loans. At the moment, only two banks still provide these at all. One can be sure though that the interest in these loans will increase again in a few years if further regulation is not passed on better disclosure of risks of such loans. A big problem at the moment are also consumer loans, secured by investment fund points. Some banks, especially those of Austrian origin, have been marketing these aggressively to the consumers who have decided to invest into their funds (a huge share of high risk funds, especially Balkan stocks based). Needless to say, no information on risks was provided to the consumers. In the last year, these consumers have been forced to continuously re-invest into the funds in order to maintain the relationship of coverage of the loan by the securities. This is a huge burden for some households, and a welcome situation for some banks’ suffering investment departments. One bank has even decided to increase the necessary coverage of the loan by the securities because of the market situation, thus further aggravating the situation of its credit takers. In the past years, many efforts have been made in Slovenia to counteract discretion for banks to change interest rates during the credit repayment. These have been quite fruitfull, so that the variable loans in Slovenia now are all linked to either EURIBOR or LIBOR (+ a fixed surplus). However, in the past months, the consumers have informed the ZPS about previously unknown clauses in some contracts, allowing the bank “to propose” a change of the fixed surplus in case the market conditions change radically. The proposals at the moment are of course on heightening the surpluses. A law on personal bankruptcy was introduced in Slovenia in 2008, containing provisions that a consumer can be released of a part of his debts after a successful probe period. Although few things can be said about its effectiveness at the moment because no court practice has been established so far, it is already clear that its provisions will not be effective for consumers without an establishment of a net of special advisory offices that would offer the consumers legal, social and educational support during the bankruptcy procedure and the probe period afterwards. The government is at the moment showing no interest in discussing the necessity of overindebtedness advice, although it is clear that bankruptcies will be increasing rapidly with the spreading economic crisis. A further novelty in Slovenia is a credit register for consumers, based on the new law on banking. The law needed to be improved because its previous version has given the banks complete discretion on which personal data to use and for how long it can be kept by the register, which resulted in ZPS’s initiation of a constitutional complaint. The new law now defines the data precisely and installs higher penalties on data abuse. Unfortunately, the ZPS was not successful in promoting the idea of installment of the credit agency within the financial market supervisor, as it is the case p.e. in Belgium. The data, when also supervised by the regulator, could serve as a tool for planning measures on combating overindebtedness and tracking credit practices and disequilibriums in the market. Especially during the last year, it has become clear that access to a wide quantity of consumer data doesn’t contribute to better risk management by credit providers, and that it can even promote excessive lending practices (p.e. USA and UK). The Slovene legislator was not willing to learn from the negative experiences from abroad, mostly because of intense lobbying of the banking sector. A further lobbying success of the banking sector was the legal provision for participation of leasing companies and charge card issuers (p.e. Diners, retail market chains). It can already be predicted now that future lobbying will follow for other providers to be included, p.e. nonbank credit providers, insurances and telecommunication companies. A chance has thus been missed to learn from the financial crisis and to find a credit register that is also a tool for combating overindebtedness and promotion of responsible lending, and not only for minimizing credit provision costs by automatization of credit approvals and extracting profits from consumer data sharing. ID: 43778 Author(s): iff Publication date: 27/03/09     URL(s): www.zps.si

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Created: 22/07/09. Last changed: 22/07/09.
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