Extension of the macroprudential recommendation to consumer loans

With the aim of preventing the relaxation of credit standards and improving banks’ resilience, the Governing Board of the Bank of Slovenia has decided to expand the existing macroprudential recommendation for housing loans to consumer loans. The decision was prompted by the high growth in mostly non-purpose-specific consumer loans of longer maturities, which in the event of a reversal in the economic cycle could give rise to difficulties in the repayment of these loans. The macroprudential measure is prudential in nature, and protects banks and consumers.

The Bank of Slovenia’s assessment is that the risks in the consumer loan market are currently moderate and manageable, which is partly attributable to the favourable economic climate. However, there has been high growth in consumer loans for some time now. The factors on the supply side (low interest rates, banks’ high capital adequacy, etc.) and on the demand side (low household indebtedness, good economic climate, high employment, etc.) are still favourable, for which reason relatively high growth in consumer lending is also expected in the future. At the same time it has been found that the maturities of these loans are increasing, and often exceed the expected lifetime of consumer goods. Their long loan maturities mean that these loans will remain on bank balance sheets even when the reversal comes in the economic cycle, owing to which difficulties in their repayment loans could arise very quickly in the event of the materialisation of macroeconomic risks. In the majority of cases consumer loans are not purpose-specific, which increases the risk of the improper use of funds.

With the aim of preventing the relaxation of credit standards and improving banks’ resilience, at its 610th meeting of 22 October 2018 the Governing Board of the Bank of Slovenia decided to expand the existing macroprudential recommendation for housing loans to consumer loans.The Bank of Slovenia recommends that the ratio of the annual servicing of the total debt to the annual net income of the individual (i.e. the DSTI) when a loan agreement is concluded should not exceed 50% for persons with a monthly income of up to EUR 1,700 (or for the portion of income up to this amount), and 67% for the portion of income above EUR 1,700. It is further recommended that in the loan approval process (when assessing creditworthiness) banks should apply, mutatis mutandis, the limitations on the attachment of a debtor’s financial assets set out in the Enforcement and Securing of Claims Act (ZIZ) and the Tax Procedure Act (ZDavP-2). It is also recommended that the maturity of new consumer loans should not exceed 120 months.

Banks are hereby reminded that they must still assess the creditworthiness of the borrower themselves, and are responsible for the take-up of the risks inherent in newly approved loans.

The Bank of Slovenia will continue to diligently monitor the dynamics in household lending, and in the event of increased risks to financial stability will introduce binding macroprudential instruments as necessary.

The full text of the recommendation can be found on this link, where precise definitions of the terms are also given.