The Cabinet approved on March 9 a Consumer Credit Bill, which, after approval by Parliament, would protect the borrowers of consumer loans.
The bill refers to credits from 400 to 40 000 leva.
The bill envisages that the advertising for consumer loans should not only base the interest rate on it but also the complete cost of its annual repayment.
The credit contract should be in written form, and a copy of the contract should obligatorily be handed over to the borrower, the bill also says. The document should have the net size of the credit, its maximum size (if an agreement has been reached on such size) or the procedure for fixing the maximum size, and the complete cost of the annual repayment of the loan, as well as all the repayment conditions, including the size, the number and the dates for the repayment installments.
The contract should also bear the elements of the total value of the credit, which are not included in the calculation of the annual repayment.
A key feature envisaged in the bill is that after its approval, borrowers will be able to make earlier repayment of the loan (before the maturity period’s expiration) without having to pay penalty interest for the early move. Furthermore, the lending institution will be banned from declining early repayment.
So far, this has been a discouraging element of consumer credit, but a beneficial condition for the banks, which have been making revenues out of either the normal or the penalty interest.
After signing the loan deal, the lender could not ask the borrower to make any payments on interest rates, fees, commissions and other expenses that are not explicit in the contract.
The bill also regulates the different types of consumer credit contracts - for the purchase of goods or services, for overdraft and for credit card agreements.
When lending for goods buying, the crediting institution will be allowed to terminate the contract and ask for returning the purchased goods if the borrower delays the loan repayment by more than three months. In such a case, the size of the loan will be decreased by the price of the returned goods, after calculating the price depreciation.
The Consumer Protection Commission will be vested with the powers to control the proper implementation of the new regulations.
Banks have so far declined to comment on the new legislation, stating that amendments to the original draft might be introduced before parliamentary approval.
Experts commented, however, that the new measures will enable the easier access to consumer credits, which are feared to be the main contributor to the country’s threatening current account deficit.
According to the International Monetary Fund (IMF), the generous lending to consumers has fuelled imports, which, in turns, has increased the trade deficit and opened a wider gap in the country’s current account balance.
Bulgaria’s 2005 current account deficit widened to an all-time high of 14.9 per cent of GDP, in line with expectations, from 8.5 per cent in 2004, fuelled by high global oil prices and imports of investment goods, Bulgarian National Bank (BNB) said in early February.
The current account gap widened by 92 per cent to 3.163 billion euro last year, as the trade deficit rose 50 per cent to 4.083 billion euro.
Imports rose 26.3 per cent last year to 13.5 billion euro, while exports were 18.4 per cent higher at 9.5 billion euro.
BNB is preparing to introduce new measures on April 1 to curb the lending growth that is threatening the country’s foreign trade balance.
However, the new set of restrictions focuses mainly on mortgage lending and will hardly prevent easier access to consumer credits.
What the central bank expects is that the amended Ordinance 21 (also to be put into effect on April 1) on the minimum obligatory reserves of commercial banks kept with BNB will put a cap on the banks’ desire to extend consumer loans. The amendments expand the definition of the term “credit” used in determining the amount of the reserves.
The central bank will also recommend that loans to households (consumer and mortgage loans) should only be granted if the remaining income is at least 100 leva per household member after interest rate and principal are paid each month.
BNB has introduced a series of restrictions in the past two years to slow the growth in lending. As a result, credit growth slowed to about 30 per cent in 2005 from 50 per cent in both 2003 and 2004.
