2011-09-06
The Board of the Bank of Lithuania approved Regulations for Responsible Lending aimed at protecting the population against an imprudent assumption of the financial burden, at reducing the probability of shocks of the financial system and at the same time of the national economy as a whole. These rules for lending outline clear limits that credit institutions will not be allowed to breach when issuing loans to natural persons and evaluating their solvency.
”Regulations for Responsible Lending is not a panacea that will cure wounds of the recent credit boom. They are more likely an inoculation that will help to suppress a pandemic giddiness from credits and living beyond one’s income. Only by the help of responsible lending and borrowing we shall diminish the blowing of price bubbles blasting painfully and the risk of an economic imbalance,” states Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
The Regulations establish that the loan-to-value of pledged assets ratio of credits for the acquisition of assets cannot exceed 85 per cent of the market value or price of pledged assets (when calculating this ratio a smaller indicator will be applied). More stringent requirements will be applied for the second and subsequent credits given to the same credit beneficiary, for loans issued for the acquisition of real estate located in the non-European Economic Area. Moreover, by applying the loan-to value of pledged assets ratio the banks will be obliged to assess the currency risk. In certain cases the maximum loan-to –value of pledged assets ratio will be allowed to be raised up to 10 percentage points.
According to the Regulations, the maximum loan-to value of credits given for the acquisition of agricultural plots, excluding some exceptions, cannot exceed 40 per cent of the price or market value (a smaller indicator shall be applied) of the acquired plot.
The maximum amount of the monthly credit repayment and interest contribution of the credit beneficiary shall (according to all liabilities) be not more than 40 per cent of the entity’s income recognised as sustainable, and the maximum credit maturity cannot exceed 40 years.
The Regulations for Responsible Lending obligate the banks to provide information to their customers about probable risks in taking loans in a more comprehensive and responsible way.
When preparing the Regulations, the Association of Lithuanian Banks, the Lithuanian Real Estate Development Association, other market participants, the European Central Bank were consulted. A substantial part of proposals received was taken into consideration.
The Regulations will come into effect from 1 November 2011 and be mandatory for all credit institutions operating in the country. They will be applied to new credits issued to natural persons. Given the development of the national economy, lending rules may be adjusted.
”Having learnt lessons from the crisis, banks are currently applying more stringent conditions than those established in the Regulations. Responsible lending should serve a stable, gradual development of the financial sector and housing market by avoiding recently evidenced dramatic shocks. A balanced development is useful for all market participants: credit beneficiaries, banks, real estate projects developers,” resumes Mr Vitas Vasiliauskas.
Similar lending principles have been set in Sweden, Denmark and other countries.