2011-05-30
The Bank of Lithuania is taking the initiative to anchor responsible lending principles
The Bank of Lithuania is taking the initiative to anchor the responsible lending practice to ensure financial system sustainability and to eliminate the factors that may pose new threats to its stability. The draft Responsible Lending Guidelines prepared by the Bank will be presented to the Association of Lithuanian Banks shortly. It is also planned to discuss it with the Lithuanian Association of Bank Customers.
“We developed this document as a tool of ensuring market discipline, as an antidote against financial nearsightedness and as an instrument that will help to protect the consumers that are less knowledgeable in economics from the burden of financial obligations that is too heavy for them”, the Guidelines were commented by Mr. Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania. According to him, the purpose of the document is to limit systemic risk and to protect the market from inadequate real estate price changes, too rapid growth of the loan portfolio and excessive risk concentration.
The Responsible Lending Guidelines prepared by the Bank of Lithuania should by applied to all credit institutions operating in Lithuania: domestic banks, foreign bank branches and credit unions.
The draft Guidelines propose the maximum loan to value ratio of 85%. This means that the size of the loan granted should not exceed 85% of the value of the assets purchased for it. Even more conservative ratio should be applied in those cases when the currency of the loan and the currency of the borrower’s income are different. It is planned to apply tighter requirements to the loans used by the borrowers to buy not the first residential real estate and to the loans used to buy real estate located in places other than the European Economic Area.
According to the proposal of the Bank of Lithuania, the loan granted for the development of commercial real estate projects should not exceed 75% of the project’s value, whereas the size of credits granted to acquire agricultural land with the intention to change the purpose of the land should not exceed 40% of the value of the acquired assets.
The Guidelines also define the criteria for the assessment of the borrower, present the sizes of the ratio of the loan, its redemption payment and the borrower’s income to be followed by the bank when granting a loan. According to Mr. Vasiliauskas, solvency of the borrower, sustainability of its income and its capability to repay the loan using the money earned instead of by selling the pledged assets are especially important responsible lending principles.
“The loan is a transaction, where at least two parties participate and both parties must be cautious and responsible”, said Vitas Vasiliauskas. He emphasized that the credit institution should provide the information to the borrower in writing, using reasonable terms and user-friendly form, so that each borrower has a possibility to compare alternative proposals, select the proposal that is most acceptable to it and assume responsibility for it. Therefore, the document prepared by the Bank of Lithuania also defines what information should the credit institution provide to the borrower to help it to assess the assumed obligations and its capability to comply with them responsibly.