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Bank of Slovenia tightens measures in the area of household lending

10/28/2019 / Press release

The Bank of Slovenia finds that the risks associated with consumer lending remain elevated, despite our previous actions. 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 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.

As of November 2019, the Bank of Slovenia is therefore changing the recommendation into a binding instrument in the area of consumer lending, placing caps on (a) the maturity of consumer loans, and (b) the ratio of the annual debt servicing costs to the borrower’s net income (DSTI). The second requirement also applies to housing loans.

Current Bank of Slovenia measures

With the aim of preventing excessive credit growth and excessive leverage, back in September 2016 the Bank of Slovenia introduced the non-binding macroprudential recommendation for the area of housing loans. This introduced the following instruments for new housing loans:

  • a cap of 80% on the ratio of the amount of the loan to the value of the residential real estate collateral (LTV);
  • a cap on the ratio of annual debt servicing costs to the borrower’s net annual income (DSTI). This ratio may not exceed: (a) 50% for borrowers whose income is less than a net monthly wage of EUR 1,700, and (b) 67% for the part of the borrower’s income in excess of this threshold.

In November 2018 the Bank of Slovenia introduced the macroprudential recommendation for household lending, which extended the DSTI instrument to consumer loans. A maximum maturity was also recommended for consumer loans.

High risks associated with consumer loans

The Bank of Slovenia finds that the risks associated with the growth in consumer loans have not diminished, even after the extension of the macroprudential recommendation. Year-on-year growth in consumer loans remains high, in excess of 10%, and the average value of consumer loans is also increasing. According to the latest figures, year-on-year growth in consumer loans stood at 11.7% in August, while the stock amounted to EUR 2.9 billion, and is fast approaching its pre-crisis level (it is now only EUR 44 million or 1.5% less). 

A high proportion of consumer loans are failing to comply with the recommended cap on DSTI, according to which the ratio of the annual debt servicing costs to the borrower’s annual net income may not exceed the recommended values.

The average maturity of new consumer loans has also increased in recent years. Having stood at 5.6 years at the end of 2015, the figure had lengthened to 7 years by August of this year. The stock of consumer loans whose maturity is more than 10 years is also increasing: having stood at EUR 271 million at the end of 2015, according to the latest figures, it stood at EUR 516 million in August of this year. The longest maturities of consumer loans are actually exceeding 12 years.

The Bank of Slovenia finds that almost a quarter of new consumer loans in terms of value are failing to comply with the recommendations.

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.

Bank of Slovenia measures

The Bank of Slovenia has therefore decided to change the recommendation into a binding instrument. Commercial banks, savings banks and branches of foreign banks will be required to uphold the two Bank of Slovenia requirements as of November of this year:

  • A cap on the ratio of annual debt servicing costs to the borrower’s net annual income (DSTI): This ratio may not exceed: (a) 50% for borrowers whose income is less than twice the gross minimum wage, and (b) 67% for the part of the borrower’s income in excess of this threshold. The borrower must be left with no less than the net minimum wage after servicing the debt. The amount is raised as appropriate for borrowers with dependent family members.
  • Limit on maturity: consumer loans may not be approved with a maturity of more than 7 years.

The Bank of Slovenia is maintaining the cap of 80% on the ratio of the amount of the loan to the value of the residential real estate collateral (LTV) in the form of a recommendation.

We allow for the possibility of certain deviations from the binding requirements, although they may comprise no more than 10% of the value of new consumer loans or housing loans for the cap on DSTI, and no more than 15% of the value of new consumer loans for the limit on maturity.

Within the framework of its legal powers, the Bank of Slovenia will regularly check that newly approved loans are complying with the measures, and in the event of breaches being identified will act in accordance with the relevant laws.

Figure 1: Year-on-year growth in consumer loans

Source: Bank of Slovenia

 

Figure 2: Average maturity of consumer loans, and stock of consumer loans with various maturities

Source: Bank of Slovenia