Consumer crediting: Some definitions
The approval of the provision of crediting individuals enacted from January 1, 2019, lay the groundwork for the care for the financial system stability and promotion of sustainable functioning.
The loan issuing companies, when issuing loans are now obliged to evaluate the solvency of the borrower to avoid issuing to an individual an amount of loan larger than the person will be able to service. It is noteworthy that the above-mentioned regulation was only applied to individuals and not to entrepreneurial activities, such as collateral loans, where the liabilities of the person are limited to the value of the pawn.
New regulations determined the maximum possible terms for individual types of loans, namely mortgage loans - up to 15 years maximum, consumer loans secured by real estate - 10 years, while vehicle secured along with other types of consumer loans for 6 and 4 years respectively. As we know, the amount of loans to be issued to a citizen depends on income, interest rate, asset value and other factors, though we can check the rates of loans issued in lari and in currency according to March 2019 data in the system, what average interest rates can be observed, for the mortgage loans - 7.80%; for consumer loans secured by real estate - 9.80%, vehicle secured loans - 13.30%, while all other consumer loans - 16.30%.
Since the determination of the maximum term for individual products has happened, we are expecting loan issues somewhat closer to the maximum terms entirely by the system. This is primarily due to imposing maximum allowable payments by the bank in respect of the income of the borrower. In particular, the legislature has established the income limits and their corresponding percentage ratio to calculate monthly fees. At the legislative level, the PTI (Payment to Income) liability was calculated on both - contractual and maximum time terms. Specifically, if a mortgage loan term was confirmed as less than 15 years, e.g. 11 years, the bank shall be obliged to calculate the PTI both - as contract (11 years) and as the maximum permissible term (15 years) and both of them should satisfy the parameters set by the National Bank, that are known to everyone and can easily be found on the web site.
The novelty set by the regulation is the prohibition of issuing loans without assessing the borrower's solvency. It should be noted that the reform regarding the obligatory requirement for the approval of income prior to issuing a loan does not refer only to the banking institutions, but also refers to the non-banking credit institutions as well. This has narrowed the ability to reduce bank crediting and the possible uncontrollable growth of collateral or private creditor portfolio. The mentioned regulation does not directly involve the crediting of entrepreneurial activities of an individual, and the regulation imposed similar restrictions on those individuals who provide the private property to acquire business loans or act as guarantors to a business so that they do not directly participate in it. It is also noteworthy that the PTI coefficient calculated by the mentioned guarantee will also affect the subsequent loan required by them. This requirement did not apply to loans issued before 2019.
Initially there was a risk that self-employed individuals having cash income, due to non-confirmation of the revenue, would not be able to use loans, though the National Bank entrusted the commercial banks to develop the above-mentioned regulation and instructed to list in the internal procedures the method of calculating informal economy revenues, average revenue, average profit, etc. The need for the income to be accrued in the bank was not obligatory, but in case of income from the formal sector or transferring to the bank account, the banking institution facilitated the assessment of income and issuing loans at best conditions.
In the latest version of the regulation that entered into force, it is also acceptable to consider remittances from foreign countries as formal revenues. Previously this issue was considered by a bank’s policy, and the new regulation confirmed the remittances as a source of income. However, it should also be noted that the standard PTI coefficients also apply to the remittances as well as the rule that in case of the so-called collateral loans the loan issuing requirement is limited only to the movable property and can not be reimbursed to the client's other property;
The limits set by the National Bank refer to the total credit liabilities of the borrower. The total liability may include both - a single loan and several parallel loans. Service coefficient of such loan is calculated by the annuity rule of the total limit for the maximum term in accordance with the purpose for which the loan is issued. For example, an unsecured consumer loan will be counted for 4 years, mortgage loan payments - for 15 years, vehicle secured loans - for 6 years and the sum of all these payments shall not exceed certain parameters of the borrower’s net income. In addition, only the obligatory insurance fees became necessary to be taken into account, the involvement of voluntary insurance payments in the calculation of the limits remained the prerogative of the bank.
We calculated in accordance with the individual product, the maximum possible limit for persons with different incomes with respect to each individual product. We would like to clarify that the coefficient refers to the sum of income amount of all products, i.e. to citizens with a monthly income of GEL 2,500, the maximum possible monthly fee of which is GEL 875. This income is able to take a mortgage loan up to GEL 76,000 taking into consideration the maximum term and the average rate of percentage in lari in the system or may obtain a consumer loan of up to GEL 59,000 real estate loan or a vehicle secured loan of GEL 40,000 and 29,000 or other consumer loans. Of course, all these products can be combined, but the sum of monthly revenue should not exceed GEL 875.
Specifically, when buying an apartment, maximum loan guarantee indicators set by the legislation should be considered, which are 85% in lari and 70% in currency. Since loans up to GEL 200,000 are issued only in the national currency, the coefficient taken by us is 85%. For example, when purchasing 60 sq. m apartment in Didube (white carcass), it is necessary to mobilize GEL 127,053 in the region, 15.0% (varies according to the credit system's current policy) of which - GEL 19,058 is the participation requested by the borrower. The remaining GEL 107,995 with a 15-year contract term in case of the average annual 11,1% (average system rate, March, 2019), the monthly payment of the borrower will be GEL 1,234. If using limits set by the legislator, the citizen should be confirmed GEL 2,743 monthly minimum taxable income.
The above-mentioned examples are hypothetical and the marginal loan rates change according to the banking institution in regard to the currency, interest rate, guarantee assessment and product risks.
The legislator also drew attention to hedging and non-hedging loans. Hedging loan is a loan when a citizen has a loan in currency (e.g. in US dollars) and therefore income is also expressed in the same currency (in US dollars). If the borrower's debt was fixed at $ 20,000 by the 1st of January 2015, the purpose of which was to hold the renovation works, with 36 months left of the term, the annual accrued rate is 7%, and the net salary was equal to GEL 2,500, then the loan will not be added. In order to make this happen, the citizen must have a net salary of at least GEL 5,500.
The indicators of the first quarter of 2019 have shown that the retail credit portfolio decreased by 1.07% compared to December 2018. The situation is sustainable since in the same period of the previous year (2018 March - December 2017) the decline was 1,1%. The main change is the share redistribution in retail credit products, for instance, the portfolio of instant loan installments was reduced by 25,12%, the portfolio of loans issued for credit cards was reduced by 2,47%, and those issued for renovation works – by 2,32%. However, overdraft portfolio has increased by 35.74%. In total, the mortgage loan portfolio increased by 0.8%, while it was characterized by 1,34% decline in the same period of the previous year.
It may be said that the process of adaptation to new regulations is underway in retail crediting, and statistical data by the end of the year will show whether it is going to be a painless process.