October 11 (SeeNews) - Slovenia's central bank said it is tightening its rules on consumer lending as of November in order to reduce risks associated with elevated levels of household loans.
"Although we have alerted banks and consumers, and introduced recommendations with regard to the maintenance of moderate growth in consumer loans, the rate is nevertheless still in excess of 10%," the central bank said in a statement earlier this week.
"The Bank of Slovenia has observed a high level of deviations from the recommendations in two areas in particular, namely the debt service to income ratio, and the average maturity of consumer loans, which in certain cases even exceeds 12 years," it added.
Therefore, as of November, the bank has decided to change the current recommendation into a binding instrument, requiring local commercial banks to uphold two requirements.
The first one includes a cap on the maturity of consumer loans, which should not be approved for more than 7 years.
The second requirement is a cap on the ratio of annual debt servicing costs to the borrower’s net annual income (DSTI), which should not exceed 50% for borrowers whose income is less than twice the gross minimum wage, and 67% for borrower whose income in above this threshold.
As a result, the borrower must be left with no less than the net minimum wage after servicing the debt, the central bank said.
The DSTI requirement applies also to housing loans.
The rules allow certain deviations, but they should not exceed 10% of the value of new consumer loans or housing loans for the cap on DSTI, and 15% of the value of new consumer loans for the maturity cap.
The central bank also said it is maintaining as a recommendation the current 80% cap on the ratio of the amount of the loan to the value of the residential real estate collateral (LTV).
The Bank of Slovenia first introduced the current DSTI and LTV measures as recommendations on new housing loans back in September 2016, aiming to prevent excessive credit growth and excessive leverage.
It extended the recommendations to household lending in November 2018, also recommending a maximum maturity for the consumer loans.
The central bank pointed out that almost a quarter of the new consumer loans in terms of value does not comply with its recommendations.
According to the latest figures, consumer loans rose by an annual 11.7% in August, with their stock amounting to 2.9 billion euro ($3.2 billion), and fast approaching its pre-crisis level (it is now only 44 million euro, or 1.5%, below it), the bank warned.
Moreover, a high proportion of consumer loans is failing to comply with the DSTI cap recommendation.
In addition, the average maturity of new consumer loans increased to 7 years in August 2019 from 5.6 year at end-2015.
The stock of consumer loans with over 10 years maturity has also increased - to 516 million euro in August from 271 million euro at end-2015.
The longest maturities of consumer loans actually exceed 12 years.
"These developments are a cause for particular concern in a time of slowing economic growth, which is also being reflected in the labour market. The Bank of Slovenia and other institutions are also warning of the high risk that the economic picture could deteriorate in the future," the central bank concluded.
($=0.907784 euro)