Changes in payday loan market — more responsible lending, fewer indebted
In the first half-year of 2016, the volume of payday loans granted in Lithuania decreased by two thirds year on year, whereas the amount lent to customers halved. Credit lenders assessed customer solvency more responsibly. For the first time in history, credits overdue reduced in number.
‘Changes are evident. Active supervision, stricter requirements of the Law on Consumer Credits that came into force at the beginning of the year, and competition forced credit lenders to fundamentally change their approach and assess customer solvency more cautiously. All these changes alleviate the overdue loan repayment burden, which also mitigates the risk of severe social repercussions,’ said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
In the first half-year of 2016, the overall volume of new payday loans granted, compared to the previous half-year, reduced by 68.7 per cent — to 130 thousand; in the same period, the amount of payday loans granted decreased by half — to EUR 65 million, its lowest value since 2013.
Consumer credit lenders assessed consumer solvency much more cautiously. In the first-half year of 2015, approximately 40 per cent of applicants were granted a payday loan; year on year, the share of approved applications contracted to 26 per cent. Indebtedness of persons younger than 25 declined by nearly a quarter. In mid-2015, young persons accounted for approximately 30 per cent of total customers of payday loan companies; now their share does not even account for 23 per cent.
Recently the volume of loans overdue contracted. Year on year, the amount of credits overdue for 30–90 days reduced by more than a third (or 34.9%), leading to a first-time-ever annual contraction in the volume of overdue loans.
‘Inadequate assessment of customer solvency was the main problem in this market. Latest checks show that companies tend to record significantly fewer solvency assessment violations; however, even though recent trends are favourable, we will continue to monitor the market closely, and, as was the case until now, will not tolerate irresponsible lending,’ said V. Vasiliauskas.
Since 2012, when it took over the consumer credit market supervision, the Bank of Lithuania has imposed 45 penalties on payday loan companies for lending to the unemployed, students and other violations; the total amount of fines exceeded EUR 270 thousand. At the end of last year, the operations of UAB 4finance, the largestpayday loan company, were suspended due to multiple gross violations in assessing customer solvency. More responsible consumer credit lender behaviour is also underpinned by more stringent sanctions for violations, set forth in the Law on Consumer Credit.
The Bank of Lithuania had already urged to tighten the requirements of the Law on Consumer Credit three years ago. At that time, in order to solve the problems in this sector as quickly as possible, the supervisory authority prepared at its own initiative systemic amendments to the Law and presented them to the Ministry of Finance. Later, a working group was set up in Seimas to improve the Law on Consumer Credit. It also involved representatives of the Bank of Lithuania and the Ministry of Finance. Part of the amendments to this Law, proposed by the Bank of Lithuania, was introduced last year when Seimas adopted the amendments to the Law on Consumer Credit prepared by the aforementioned working group; they came into force in February this year.
Recently, the average annual interest rate on payday loans followed a downward trajectory, decreasing from 72 to 42 per cent over the year. The Law on Consumer Credit had a significant effect on small credit rates. Having amounted to almost 100 per cent last year, this year the average annual interest rate on small consumer credits has been fluctuating around 65 per cent, falling short of the 75 per cent interest ceiling laid down in the Law. The cost of consumer credit is also influenced by the strengthening competition between payday loan companies and peer-to-peer lending platforms.
However, the share of funds lent by peer-to-peer lending platforms, in comparison to that by payday loan companies, remains small, even though pronounced growth is recorded. Over the half-year — from the beginning of 2016 to July 1 — the loan portfolio of these platforms doubled — from EUR 2.3 to 4.6 million. It accounted for nearly 2 per cent of the entire loan portfolio of payday loan companies and peer-to-peer lending platforms, which amounts to approximately EUR 225 million. In mid-2016 there were almost 4 thousand customers using peer-to-peer lending platforms, and almost 380 thousand customers of payday loan companies.