1. What are the limits on consumer lending criteria?

The CNB limits the ratio of monthly debt service to consumer income (debt service to income, DSTI) to a maximum of 45% for housing loans and 40% for non-housing loans; for housing loans, the ratio of the total loan amount to the value of the real estate serving as collateral (loan to value, LTV) may not exceed 90%. In addition, maturity of housing and non-housing loans is limited to thirty and ten years, respectively. However, up to 20% of housing and 10% of non-housing loans in each quarter may be granted in excess of the said DSTI and LTV limits on the basis of the bank’s own assessment. The exceptions in granting housing loans may largely be used for consumers applying for a loan to address their housing needs.

2. What is the objective of these limits?

By introducing the measures, the CNB seeks to prevent excessive loosening of lending criteria. The measures serve as a kind of safety net to limit excessive consumer borrowing, and excessive risk-taking by banks, which could lead to loan repayment difficulties and create losses for both consumers and banks, adversely affecting economic growth and financial stability. In the current conditions, the introduction of measures also helps achieve the objective of price stability because the limits on lending criteria may reduce credit-financed spending and indirectly influence the slowdown in price growth.

3. Will the imposition of measures reduce inflation?

Although macroprudential policy measures are primarily aimed at preserving the stability of the financial system as a whole, under the current macroeconomic conditions characterised by strong household consumption, the measures also help to reduce inflationary pressures arising from increased demand.

4. Why are these measures introduced by the CNB just now?

Strong credit growth halted the several-year decline in relative household debt in 2023, during which the household debt-to-GDP ratio fell from 44% in 2010 to 32%. Given the expected slower income growth and continued credit growth, relative household debt could now start to grow. Recent data also show that housing loans are granted under more lenient criteria and have longer average maturity, which increases the risk of default during loan repayment. Some deterioration in the repayment of general-purpose cash loans has already become evident, for loans granted two to three years ago. These loans were granted at a time of relatively weak credit growth and their recoverability deteriorated in a period of buoyant income growth. By introducing the measures, the CNB aims to reduce a further increase in household vulnerability to possible adverse macroeconomic scenarios and mitigate the risks to financial stability associated with a potential deterioration in loan recoverability.

5. Does the CNB now decide to whom a bank can or cannot give a loan?

No. Although the CNB prescribes the minimum criteria for loan approval, they cannot and should not replace internal bank procedures for loan approval and risk assessment, nor can they address the actual risks at the level of each individual loan. Banks still determine their own lending policies independently and are obliged to assess creditworthiness in each loan application. However, credit policies have to comply with the minimum criteria prescribed by the CNB.

6. What will be the impact of the measures?

The CNB expects the implementation of the measures to slow down the growth of household borrowing, particularly in the segment of non-housing loans (simulation of the effects of the application of the measure on loans granted from mid-2023 to mid-2024 shows that the annual growth rate of housing loans, instead of the realised 9.2%, would stand at around 8.5%, while for non-housing loans, instead of around 16% it would be around 12.5%) and reduce the share of loans granted under relatively loose criteria (in 2024, around a third of housing loans were granted with a DSTI ratio above 45%, with the average DSTI ratio growing from 38% in 2022 to 41% in 2024, while around 30% of housing loans were granted with the LTV ratio above 90%. The share of loans with a DSTI ratio above 40% held steady for non-housing loans, standing at slightly below 30% of new loans in 2024. This reduces the risk of excessive consumer borrowing.

7. Will residential real estate prices be affected by the imposition of the measures?

Macroprudential policy measures are not introduced with the intention of affecting the real estate market. Supply and demand for residential real estate are influenced by a number of factors, as well as various policies such as tax, social, housing and monetary policy. The measures are being put in place to limit excessive borrowing and support responsible bank lending practices. This also helps to preserve the financial resilience of households to unfavourable macrofinancial conditions and the stability of the financial system. However, research shows that borrower-based measures in the medium term may indirectly slow down the pace of residential real estate price growth, although this effect also depends on the part of residential property demand financed by loans.

8. Why has the CNB allowed banks to grant some loans in excess of the prescribed ratios?

The exceptions form an integral element of the measures. The CNB recognises that under certain circumstances it is justified to grant loans in excess of the limits, based on a detailed bank’s assessment of a debtor’s creditworthiness. More exceptions are allowed for housing loans in order to alleviate a possible unfavourable impact of measures on consumers for which banks estimate that they could take on and service a larger debt burden in an orderly manner, while the loan addresses their housing needs.

9. Why does the CNB prescribe different ratios and numbers of exceptions for housing and consumer loans?

Different minimum approval criteria for housing loans and other loans are based on a different risk assessment of these two groups of loans. Housing loans are secured by real estate property; in a historical perspective, they have shown a much higher degree of recoverability, even in periods of stress. In contrast, cash loans are usually not secured and problems with their regular repayment occur faster and more frequently than for housing loans. Furthermore, housing loans are subject to additional creditworthiness assessment criteria that take into account the possibility of enforcement of the monetary funds of consumers, which already limit consumer borrowing, particularly for lower income groups, much more strictly than the new measures. Also, in addition to the debt service-to-income ratio (DSTI), they are subject to a limit on the maximum ratio of loan amount to the value of the real estate serving as collateral (loan-to-value ratio, LTV).

10. Who decides whether to grant a consumer loan under the specified tolerances?

The bank. Each bank may decide to grant loans within the permitted exceptions, based on an assessment of a consumer’s creditworthiness and in line with its own credit policies.

11. Does the CNB’s Recommendation on actions in granting non-housing consumer loans continue to apply?

Yes. In order to align the criteria for creditworthiness assessment of consumers concluding a contract on a non-housing loan with a maturity of five years or more with the criteria that banks have to observe when granting housing loans^[1], in 2019 the CNB recommended that banks take into account, when granting non-housing loans, minimum costs of living that may not be less than the amount prescribed by the act governing a part of salary exempt from foreclosure. This recommendation shall remain in force.

12. What is all of a consumer’s debt?

The total debt of a consumer to a bank is key for the calculation of the DSTI ratio, which shows the share of the consumer’s monthly income allocated for debt repayment. Total debt includes all consumer’s outstanding liabilities towards banks from previously contracted loans, including a new loan the consumer intends to take, as well as any other outstanding liabilities to other creditors known to the bank. Debt also includes the use of current account overdrafts and credit card loans, but it does not include monthly consumption financed by charge cards. If a new loan is used to repay an existing loan or other liability, the liabilities settled by that loan are not included in the total debt calculation.

13. How does the use of an overdraft facility affect the creditworthiness of consumers?

The use of an overdraft facility (permitted or tacit) on a current account is included in monthly debt repayments under the assumption that the consumer will repay the debt in full within three years and under the assumption of annuity repayment. For example, if a consumer with a monthly income of EUR 1350 uses an overdraft of EUR 500 with an interest rate of 5.65%, the monthly repayment cost of the overdraft for the purpose of calculating total debt amounts to EUR 15.13. If the consumer takes out a loan with a monthly instalment of EUR 300, consumer's total monthly debt repayment burden amounts to EUR 315.13 (300 + 15.13), and the DSTI ratio will be 23.34% (315.13/1,350).

14. How will the new measures affect the banking system?

In view of the expected slight slowdown in lending, particularly in the segment of riskier loans that may have been granted at higher interest rates, the measures could in the short run lead to a decrease in bank profitability. However, over the longer term they should ensure a better quality of the banks’ credit portfolios and reduce their potential losses due to loan defaults, which would contribute to the stability of bank operations.

15. How will the CNB monitor the implementation of the measures?

The CNB will monitor the implementation of the measures on the basis of data on consumer lending standards, which have been collected from banks for each loan disbursed since the end of 2020.

16. What happens if banks fail to comply with the measures?

Failure to comply with measures or an act contrary to a decision of the CNB constitutes a breach which, in accordance with the Credit Institutions Act, results in a fine for both the bank and the responsible person of its management board.

17. Are there such measures also in other European countries?

Yes. As early as 2016, the European Central Bank recommended that all euro area members introduce into their national macroprudential policy frameworks the legal basis for borrower-based measures. Today, they form an integral part of the macroprudential toolbox in 23 out of 27 EU member states, with Croatia being the 24th member state putting into effect such measures. As the measures have not yet become part of the harmonised macroprudential toolbox, such as capital buffers, their definitions and calibrations are not identical in different countries.

18. Illustrative examples^[2]

Housing loan:

A married couple with a total monthly income of EUR 2,500 takes a loan of 25 years at an interest rate of 4%. The value of the residential property is EUR 240,000.

What is a maximum loan amount that the bank can grant in this case?

Condition 1 – DSTI ratio: The maximum monthly loan annuity allowed is 45% of EUR 2,500, that is EUR 1,125.

The maximum amount of the loan with a repayment term of 25 years and the interest rate of 4% is EUR 213,135.

Condition 2 – LTV ratio: 90% of the property value

The maximum amount of the loan relative to the value of the property is 90% of EUR 240,000, i.e. EUR 216,000.

The married couple may take a loan of a maximum amount of EUR 213,135. This amount could be higher if the maturity term is extended from 25 to the maximum permitted 30 years; in that case, the loan could amount to a maximum of EUR 235,644.

Cash loan:

A consumer takes a car loan of EUR 15,000 with an interest rate of 6% and a repayment term of 10 years. The consumer receives a monthly income of EUR 1,800. Can the consumer take the desired cash loan?

Condition 1 – DSTI ratio: The maximum monthly loan annuity allowed is 40% of EUR 1,800, that is, EUR 720.

The monthly cash loan annuity in the example is EUR 166. Consequently, the consumer may take the cash loan referred to in the example (166 < 720).

Housing and cash loans:

A consumer takes a cash loan of EUR 5,000 with an interest rate of 6% and a repayment term of 10 years. The consumer receives a monthly income of EUR 1,400 and already repays a monthly instalment of EUR 540 for a housing loan. Can the consumer take the desired cash loan?

Condition 1 – DSTI ratio: The maximum allowed ratio of total monthly debt service to income is 40% of EUR 1,400, i.e. EUR 560.

The consumer already spends EUR 540 per month on servicing housing loan annuities. As the maximum allowed repayment burden for all loans combined is EUR 560, the monthly instalment for a cash loan may not exceed EUR 20 (560 – 540 = 20).

The maximum possible amount of the cash loan with a repayment term of 10 years and an interest rate of 6% is EUR 1801.

1. Decision on the additional criteria for the assessment of consumer creditworthiness and on the procedure of collection of arrears and voluntary foreclosure (Official Gazette 107/2017) ↑

2. The examples serve only as an illustration of the functioning of the measures and do not take into account banks’ internal policies. The simplified calculations presented may deviate from the calculations of individual banks and they are not binding. ↑