NBS Adopts Regulations to Promote Sustainable Household Lending Practices
At its meeting of 24 December 2018, the NBS Executive Board adopted the following decisions that were published in the “RS Official Gazette”, No 103/18 of 26 December:
- Decision on Managing Concentration Risk Arising from Bank Exposure to Specific Products,
- Decision Amending the Decision on Bank Capital Adequacy, and
- Decision Amending the Decision on the Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items.
The adopted set of regulations comes as a response to the recognised need for the NBS’s proactive approach to the increasingly recurrent approval of unsecured non-purpose loans to households at unreasonably long maturities. The NBS has therefore expanded its supervisory toolkit and adjusted prudential requirements for banks in order to bring the described practice within acceptable bounds. While the estimated credit-to-GDP gap is recovering, but is still below its long-term trend, the closing of the gap in some segments of household lending indicates risk and calls for targeted measures to curb the risk without undesirable repercussions on the overall lending activity.
As often underscored in the prior period, the NBS did not go for solutions that would represent an administrative measure of prohibiting certain activities (e.g. prohibiting banks from approving some loans to natural persons at long maturities, i.e. prescribing the maximum repayment term for those particular loans). Instead, in drafting these regulations the NBS took particularly into account the financial position and creditworthiness of the citizens who borrow from banks, the riskiness of the loans in terms of their purpose, collateral requirements, repayment ability from the aspect of the borrower’s total credit indebtedness and the justifiability of the length of the repayment term depending on the loan purpose or absence of any particular purpose.
Starting from the above, the new regulations aim to contribute to the prevention of non-performing loans in the banking system and to pre-empt any potential consequences on financial stability and citizens, in case of materialisation of the risks that are typical for uncontrolled approval of non-purpose household loans at maturities that do not correspond to the riskiness of this type of products and the creditworthiness of individual borrowers. In this context, the key novel solutions envisaged by the above regulations and relating to lending to natural persons (which within the meaning of these regulations exclude farmers and entrepreneurs) are as follows:
- a new indicator of concentration risk has been introduced, which primarily includes a bank’s current portfolio of cash, consumer and other loans (other than housing loans and current account overdrafts) with the agreed maturity of 8 years or more that were approved or will have been approved before the start of application of the new set of regulations (loans approved and disbursed ending with 31 December 2018). The newly introduced indicator represents an additional regulatory and supervisory instrument of the NBS that will help bring the current stock of these loans within reasonable bounds at an appropriate and gradual pace, given that the capacity of an individual bank to extend new consumer, cash and other loans (other than housing loans and current account overdrafts) with a repayment period of 8 years or more will be directly conditional on its compliance with the prescribed percentage cap on the bank’s exposure to concentration risk;
- a 60% credit indebtedness limit has been prescribed – if this limit is exceeded as a result of approval of any loan to a natural person after the entry into force of the new regulations, a bank is required to disclose its exposure to that particular borrower separately when reporting to the NBS on its asset quality. The level of credit indebtedness is determined as the ratio of the borrower’s total monthly credit liabilities and regular net monthly income (debt-to-income ratio);
- if a bank, starting from 1 January 2019, approves a consumer, cash or other loan (other than a housing loan or a current account overdraft) due to which the level of the borrower’s credit indebtedness exceeds 60%, or the borrower’s credit indebtedness exceeded 60% even prior to the loan approval, the bank will be required to reduce its capital (calculated in accordance with banking regulations for the purposes of monitoring compliance with the prescribed capital adequacy ratios) by the total outstanding principal amount of the exposure to that borrower until the loan is repaid in full;
- if a bank, in the course of 2019, approves a consumer loan (other than for the purchase of motor vehicles), cash or other loan (other than a housing loan or a current account overdraft), with a repayment term of 8 years or more, it will be required to reduce its capital (calculated in accordance with banking regulations for the purposes of monitoring compliance with the prescribed capital adequacy ratios) by the total outstanding principal amount of the exposure to that borrower until the loan is repaid in full. In 2020 banks will be required to reduce their capital in the same manner if the above types of loans with a repayment term of 7 years or more are approved, while starting from 1 January 2021 the same shall apply in case of a repayment term of 6 years or more;
- if a bank, starting from 1 January 2019, approves a consumer loan for the purchase of a motor vehicle with the agreed repayment term of 8 years or more, it will be required to reduce its capital (calculated in accordance with banking regulations for the purposes of monitoring compliance with the prescribed capital adequacy ratios) by the total outstanding principal amount of the exposure to that borrower until the loan is repaid in full.
As before, banks will be free to regulate, within their credit processes, the criteria and principles for approving particular types of loans and, in making a loan approval decision, to assess the borrower’s creditworthiness and other relevant factors. A borrower's risk profile (established based on the borrower's creditworthiness, timeliness in the settlement of liabilities and quality of collateral) may affect the bank's loan approval decision. Same as before, after the start of implementation of the new regulations, nothing will prevent banks from approving loans with a longer repayment term or from lending to borrowers with higher credit indebtedness provided that they continue to maintain the appropriate level of capital, i.e. continue to hold, at all times, a sufficient level of own funds to meet all regulatory requirements.
These regulatory novelties are yet another proof of the NBS's continuous efforts to timely set up a normative framework for banks, as appropriate and comprehensive as possible, based on the practices identified in the local banking market and quantitative assessment of the effects of prospective regulatory solutions. The adopted set of regulations reflects the NBS's objectives – to encourage cautious risk-taking by banks, without prohibiting the approval of particular types of loans. Rather, the NBS is guiding banks towards sustainable lending practices and avoidance of excessive exposure to specific types of credit products, without undermining the trend of lending growth, while at the same time taking care of the rights and interests of bank services consumers, all with a view to preserving and strengthening financial stability in the Republic of Serbia.
The new regulations come into force on 1 January 2019.
Bank Supervision Department