Conditions for lending companies change

Tightened regulation may push low-income clients into a grey zone.

(Source: Sme)

After the latest legislative changes tightening rules for operation of lending companies in Slovakia became valid in late 2015, one of the biggest lending companies in Slovakia announced it will no longer lend money here, while other companies have curbed their lending activities too and are pondering their future operations here.

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Analysts, while on one hand praise the tightening of regulations, as some questionable lending practices have led to many financially-ruined clients; warn that the current regulatory framework may disable one group of clients from obtaining a legal loan and thus forces them into the hands of illegal usurers.  

“I perceive in a very positive way that the market of non-banking companies has started to be regulated,” Maroš Ovčarik, a financial expert from website comparing bank products, told the TA3 news channel, but adding that there is a risk that people with low or no regular incomes without access to bank loans when in need would turn to the black, unregulated, market.

Departure from the market

The non-banking Provident Financial company of British consumer credit lender International Personal Financial, one of the most important lending companies in Slovakia, announced in late February it will no longer lend money in Slovakia. It explained its decision by laws pushed through by the ruling Smer party.

“After thoroughly assessing influences on our business we have decided to end providing credits to households via the network of dealers and also not to offer credit on account,” firm spokesperson Nick Jones told the private TV Markiza.

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Provident Financial estimates that it will lose €6.3 million to €8.9 million on winding down its business in Slovakia, the Sme daily reported.  

While it stopped lending money, existing loans are valid and the company will continue collecting instalments from its clients.

Adopted legislation

During the last two years the Slovak parliament controlled by Smer adopted several legislative changes regulating the market of non-banking companies in efforts to protect their clients from unfair practices of some companies. The latest legislation adopted became valid in late December 2015. It, among others introduces a rate cap on loans provided by non-banking companies that equals double of an average annual percentage rate of bank loans. This final rate must also include fees for additional services, for example insurance or sending notification text messages or emails. Moreover, provision of a loan cannot be conditioned by subscribing to any additional service, a practice by which some lending companies increased the final price of the loan and thus also their incomes. They also cannot provide cash loans. The legislation also curbed the possibility that when owing some hundreds of euros to a lending company, a debtor can even lose his or her house or flat.

Non-banking companies explain their high rates with a high risk rate of their clients when sometimes the rates exceeded percentages in the hundreds.

Non-banking companies are also obliged to obtain a licence from the National Bank of Slovakia (NBS) to operate on the market. Out of about 300 companies only about one tenth applied and got the licence.  

Ovčarik welcomes licencing of non-banking companies.

“It was illogical that banks providing loans were under strict supervision of NBS and on the other hand, non-banking companies often offering much less advantageous loans were not under its supervision,” said Ovčarik as cited by the TASR newswire. “The market got cleared, but it is questionable how much the border will move in order there does not occur a group of clients without a possibility to take a loan. This means a risk for growth of the grey economy.”

Other lenders ponder impacts

Other lending companies have curbed their lending activities and are pondering their future in Slovakia too. Telervis Plus and Fair Credit have already significantly reduced their lending as well.  

“We are looking for solutions in order that we can stay on the market,” Fair Credit marketing manager Karol Polakovič told Sme. “We have designed a product that should be in line with legislation. We believe that it will generate sufficient revenues for coverage of costs.”

Profi Credit Slovakia has also changed its offer.

“It should be reassessed whether all adopted laws really help consumers and whether the ability of loans is secured,” said Richard Lӧrincz, marketing director of Profi Credit Slovakia.  

Ovčarik of calls for an impact study, admitting that the current regulatory framework may force low-income people from some social groups for which credit at non-banking companies are primarily designed, when in need, to take loans from usurers, who are completely beyond any regulation.

The financial expert estimates that non-banking companies that decided to curb their operation in Slovakia had 230,000 clients in Slovakia and that they provided loans of €124 million in 2014.

On the other hand, another lending company Cetelem Slovensko plans to transform into a bank.

Ovčarik explains this with the general situation on the market of non-banking companies while there operate also companies that are highly liquid and actually they, by conditions which they give to their clients, actually compete with banks.

“There are in the market non-banking companies that are fair, reasonable and simply give also good conditions, but on the other side are non-banking companies that often offer high and too expensive non-transparent conditions,” said Ovčarik during a discussion at TA3, admitting that the situation has improved compared to some years ago. “But the former are focusing on the clientele that is addressed by banks and the business model of those on the other side is designed for risky clients at whom there is pinned a high risk that they will be not able to settle their loans. This logically reflects in higher interest rates.”

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