Restrictions on household lending: legislative change as a solution to problem of diminishing creditworthiness
The Ministry of Finance and Banka Slovenija have proposed a change in legislation as a solution to the diminishing creditworthiness of households. In the context of the most recent rise in the minimum wage in January, the two aforementioned institutions find that there has been a significant deterioration in the creditworthiness of borrowers with income below the average wage. Adjusting legislation would limit the impact of each correction to the minimum wage.
The aim of the binding macroprudential measure linked to the restriction on household lending, in force since November 2019 and adjusted in May 2022, is to establish minimum credit standards for new loans, and to limit excessive borrowing by consumers.
Defining the monthly amount that should remain after loan repayment to cover borrowers’ essential living costs was required to protect them against excessive borrowing. Because the issue of essential living costs is already governed by existing legislation in the Enforcement and Securing of Claims Act, Banka Slovenije has applied the provisions of the aforementioned act for that purpose. In those provisions, the National Assembly of the Republic of Slovenia used the minimum wage to determine essential living costs and, as a starting point, set essential living costs at 76% of the gross minimum wage.
Banka Slovenije and the Ministry of Finance find that this reduces the creditworthiness of borrowers, in particular those with income below the average wage. The objective of the Enforcement and Securing of Claims Act to protect consumers against excessive borrowing has thus led to their reduced creditworthiness.
For this reason, Banka Slovenije and the Ministry of Finance studied in detail the existing legal basis and proposed a solution to the aforementioned problem that ensures the necessary protection of consumers while not hindering government policy regarding the setting of the minimum wage.
The Ministry of Finance will therefore propose a legislative change that will govern the implementation of macroprudential supervisions.