NBS Renders Decision on Measures for Preserving Stability of the Financial System in the Context of Foreign Currency-Indexed Loans
The National Bank of Serbia (NBS), as a central institution responsible for financial system stability and protection of financial services consumers, adopted the Decision on Measures for Preserving Stability of the Financial System in the Context of Foreign Currency-Indexed Loans. The decision was rendered with a view to preserving and strengthening the stability of the financial system of the Republic of Serbia, ensuring more adequate risk management by banks and better protection of financial services consumers who bear the brunt of the negative consequences triggered by current developments in international foreign exchange markets.
This decision deals with a complex problem of currency-indexed housing loans from the systemic point of view, fully respecting freedom of contract on the one hand, and mandatory nature of regulations on the other. In its capacity of a banking market regulator, the NBS adopted a solution which helps the citizens overcome the difficulties in repaying CHF-indexed loans, as well as the difficulties caused by banks' unilateral raising of interest margins, but does not, at the same time, undermine the basic principles upheld by the NBS – legal security, market-based operation and responsibility of all market participants for the obligations assumed.
The Decision is made up of two parts. The first part applies to all loan repayment agreements concluded before the start of implementation of the Law on the Protection of Financial Services Consumers (“RS Official Gazette”, No 36/2011), regardless of the currency of indexation. This part of the Decision mandates to the smallest detail the uniform application of the NBS’s recommendation BAN 002/13 оf 31 May 2013, which relates to the application of indefinable elements of variable interest rate before the start of implementation of the Law on the Protection of Financial Services Consumers. Having analysed the effects of application of BAN 002/13 by banks, the NBS decided to mandate the manner in which funds overcharged on account of unilateral raising of variable indefinable elements of interest rate should be treated by banks. Hence, banks are required to treat the amount overcharged as early loan repayment and send the notification to each borrower with the modified loan repayment schedule within 30 days from the effective date of the NBS’s Decision. Implementation of this part of the Decision is mandatory and precedes the implementation of any other provision contained in the second part.
The second part of the Decision concerns solely the CHF-indexed housing loans. Banks are required to offer to their client borrowers, not later than 30 days from the effective date of the NBS’s Decision, four models of annex proposals containing modified terms of loan repayment, while keeping the existing loan collaterals. Borrowers must be given no less than 3 months to decide on the offer and may accept it at any time before this deadline expires.
Banks have an obligation to offer the choice of the following four modalities to their client borrowers:
- Conversion of a CHF-indexed housing loan into a EUR-indexed loan using a 5% more favourable exchange rate, interest rate equal to the rate applied to EUR-indexed loans and a possibility to request extension of the loan repayment term by maximum 5 years;
- Conversion of a CHF-indexed housing loan into a EUR-indexed loan, lowering the interest rate on EUR-indexed loan by 1 percentage point on an annual basis, but not necessarily below 3% and granting the possibility to request extension of the loan repayment term by maximum 5 years;
- Keeping the housing loan indexed to CHF, lowering the interest rate by 1 percentage point on an annual basis, but not necessarily below 3% and granting the possibility to request extension of the loan repayment term by maximum 5 years;
- Keeping the housing loan indexed to CHF, lowering the CHF-indexed monthly instalments by 20% of the contracted amount for the period of 36 months from the date of conclusion of the annex to the loan agreement, and postponing the repayment of the total amount of the reduction until the expiry of the original maturity date when it will be divided into 12 equal monthly instalments. No interest shall be calculated or charged on the receivables whose collection is postponed under this model.
In order to further relieve the burden of debt servicing of CHF-indexed housing loans and to provide a more comprehensive protection to their client borrowers, banks will not be allowed to offer conversion, under any of the modalities envisaging such an option, on the terms applied in the extension of EUR-indexed loans if such terms are less favourable than the terms applied on 31 December 2014. In order to minimise the costs of annexing loan agreements that might discourage the borrowers from accepting bank offers, and to optimise the effects of the Decision, banks will not be allowed to charge any fees for undertaking these measures and carrying out these activities nor to obtain any compensation for any related costs in regard to such measures and activities. To this end, the NBS has already contacted other competent authorities (National Mortgage Insurance Corporation, Republic Geodetic Authority, Ministry of Justice etc.) and expects that all borrowers who sign an annex to their loan agreement under the Decision will be exempt from payment of additional fees or will be charged only a symbolic fee.
The NBS estimates that the implementation of this Decision will greatly facilitate the position of the users of CHF-indexed housing loans in terms of providing modalities for loan repayment, which will, as a result, prevent a further rise in the share of CHF-indexed NPLs in total lending, thereby contributing to the maintaining and strengthening of the stability of the overall financial system.
The NBS believes that the adopted solutions provide both the preconditions and incentives for permanent resolving of the issue of CHF-indexed lending – the obligation for banks, multiple choice for borrowers, and sharing of the financial burden between the creditor and the debtor, which rules out the possibility of additional regulatory activities of the NBS in relation to these loans.
The Decision shall become effective on the eighth day following its publication in the “RS Official Gazette”.