The Bank of Lithuania proposes to tighten requirements for consumer credit drawers by way of a law
Regarding tendencies in the consumer credit market, the Bank of Lithuania will present to the Committee on Budget and Finance of the Seimas proposals to restrict activities of consumer credit drawers by way of a law.
“In the environment of aggressive marketing, the portfolio of so-called fast consumer credits has been boosting over recent years especially rapidly, however, the number of customers failing to repay their credit in due time is also soaring intensively. Rather often customers are entangled into a bewitched loan circle threatening with painful social consequences. The situation might be made normal by an obligatory checking of a person's solvency in databases, more stringent requirements for advertising and larger penalties for law violations”, says Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
Data gathered by the Bank of Lithuania reveal that as from 2011 the total portfolio of loans of consumer credit drawers which extended largely small credits (to LTL 1 000) boosted from LTL 83.18 million to LTL 206.91 million, i.e., by 2.5 times.
According to Vitas Vasiliauskas, in the context of such growth rates of market, debts of young people raise concerns in particular. The market analysis performed by the Bank of Lithuania showed that in the first quarter of 2013 small credits were issued to over 200 thousand of customers, even 71 thousand of which (35%) were consumers up to 25 years of age. The share of loans of small consumer credit borrowers overdue more than 60 days in turn amounted to 30% at the end of 31 of March 2013. The amount of overdue small consumer credits was over LTL 100 million and accounted for even 96% of total outstanding amounts of small consumer credit to be repaid.
Among the major reasons for indebtedness is an insufficient assessment of the solvency of customers. Examinations of credit drawers reveal that rather often they do not check the customer's financial position in SoDra or other databases and rely only on data presented by customers themselves. The Bank of Lithuania proposes to establish the checking of customer's solvency by a consumer credit issuing enterprise in all cases without any exceptions.
Another factor stimulating irresponsible borrowing is aggressive and misleading advertisement. Rather often consumer credit advertisements form expectations that a credit is the solution of problems although in reality it is irresponsible borrowing that is the beginning of all problems.
The Bank of Lithuania proposes to the Budget and Finance Committee of the Seimas to obligate credit drawers by way of the Law on Consumer Credit to announce in advertisements only objective, correct and clear information. Also, it is proposed to empower the supervisory authority to prohibit misleading, incorrect or unclear advertisements and oblige to deny such information.
The Bank of Lithuania also proposes to strengthen the responsibility of credit drawers in the case of law violations. Among proposals is also a possibility for the supervisory authority to eliminate the credit drawer from the consumer credit drawers list for rough violations. In addition to this, it is proposed to change the penalty imposition procedure – to relate the penalty imposed for a violation with the credit drawer's income. Having identified the violation for the first time, the penalty amount should be up to 5%, in the case of a repeated breach – to 10% of income earned from consumer credit services.
Such penalties would allow to individualize the enforcement measure and simultaneously would help to ensure the achievement of objectives of the enforcement measure – to punish the offender and deter him or her and other market participants from new offences.
The Bank of Lithuania would also agree with initiatives to decrease “ceilings” of the total consumer credit price which now amounts to 200%. However, an exact amount might be determined after a more detailed analysis.
Having assessed previous tendencies in the consumer credit market, the Bank of Lithuania prepared already at the beginning of this year and approved Regulations for Evaluation of Consumer Credit Borrowers' Solvency and Responsible Lending. The responsible lending principle enshrined in the Law on Consumer Credit – the amount of customer's monthly contributions according to total liabilities cannot exceed 40% of sustainable income – is presented in this document in more detail. At the same time the Bank of Lithuania approved Guidelines on Advertising Financial Services according to which the information provided in advertisements of consumer credit contracts must be objective and permitting the consumer to take economically grounded decisions. These changes came into effect as from 1 July.