The Croatian National Bank issued the Recommendation on actions in granting non-housing consumer loans for credit institutions and requested of banks to include all risks that arise or may arise from general-purpose cash loans in their internal capital adequacy assessment processes.
The rise in general-purpose cash loans over the past two years contributed the most to the increase in household borrowing with credit institutions, accounting for close to two thirds of the overall increase in borrowing. General-purpose cash loans grew by HRK 5.4bn in 2018, which, in addition to the rise of HRK 2.9bn and HRK 1.7bn in 2017 and 2016 respectively, points to a significant pick-up in this form of lending. At end-2018, general-purpose loans accounted for almost 40% of total household loans, compared with 33% two years before.
Although general-purpose cash loans are predominantly granted in kuna and at a fixed interest rate, which reduces risks to a certain extent, an analysis performed by the Croatian National Bank in late 2018 and early 2019 showed that, when granting general-purpose cash loans, credit institutions in Croatia apply more relaxed standards for determining client creditworthiness than when granting housing consumer loans. Banks sometimes grant a more expensive general-purpose loan that is less favourable for the consumer even in cases where they assess that the consumer does not have the appropriate level of creditworthiness for a housing loan of the same amount and maturity.
Potential risks are even higher bearing in mind the fact that over the past two years, the fastest growth was seen in non-collateralised general-purpose loans and loans with original maturity of ten years, the amounts of which are, on average, much higher than the amounts of loans with shorter maturities. By their nature, such loans are not actual consumer loans, but rather most probably substitutes for other types of loans (housing loans) that are granted under stricter conditions.
The fact that, because the Croatian Registry of Credit Obligations (HROK) has still not resumed operation, the actual amount of total debt of a loan applicant and his or her ability to service the debt are difficult to ascertain, is an additional source of risk.
Tightening new lending conditions
Negative effects of a continued steep rise in general-purpose cash loans could be fully experienced only when the economic cycle turns down. The increasing exposure of banks to non-collateralised general-purpose cash loans leads to a high accumulation of credit risk which could, if materialised amid unfavourable macroeconomic developments, cause a sharp increase in non-performing loans and result in significant losses of banks, as well as weaken future household consumption.
By tightening new lending conditions, the growth of risk in banks may be slowed down, and the public may be encouraged to be more prudent when borrowing. In order to achieve this aim, it is necessary to harmonise, to a large extent, the criteria for the assessment of creditworthiness among different types of loans. The Croatian National Bank has therefore issued the Recommendation on actions in granting non-housing consumer loans, recommending to credit institutions more careful conditions for the granting of new general-purpose cash loans, particularly those with longer maturities, while consumers are encouraged to be prudent when borrowing.
In determining the creditworthiness of applicants for non-housing consumer loans with original maturity equal to or longer than 60 months, the Croatian National Bank recommends that credit institutions apply the same criteria as those applied for housing consumer loans (i.e. to consider the minimum costs of living that may not be less than the amount prescribed by the Foreclosure Act, governing the part of salary exempted from foreclosure).
The CNB applies other measures aimed at reducing risk in the granting of general-purpose cash loans as well: within its supervisory powers, it has requested of banks to include potential losses arising from general-purpose cash loans in their internal capital adequacy assessment processes and to ensure that, in their internal bylaws, banks have in place clear mechanisms for bonus clawback in case of excessive losses stemming from such placements.
The Croatian National Bank will systematically monitor the conditions under which all consumer loans are granted and, if necessary, adjust the measures described above.