Consumer credit liberalization to benefit banks

The economic slowdown in the eurozone is expected to persuade the conservative European Central Bank (ECB) to cut its key policy interest rate by 0.25 to 0.50 basis points on June 5. Greek banks, eager to boost their earnings and please their shareholders, may look forward to the ECB’s move since it gives them some leeway to increase their net interest margins. They would be better off, however, preparing for the – long overdue – full liberalization of consumer credit, which is a much more promising proposition for enhancing their profits in the medium term. The expected reduction in the ECB’s key rate is likely to trigger a new wave of downward adjustments in deposit rates but a more selective approach in lowering lending rates, according to analysts. Although deposit rates differ from bank to bank, it is widely known that local banks with a rich deposit base do not feel the need to offer competitive deposit rates. Unlike other banks, they rely more on the interbank market for funding their loan book. This mainly explains why the former offer some of the lowest deposit rates in the eurozone. On the other hand, a rigid cost base and the need to boost interest income have made banks offer some of the widest spreads in certain adjustable rate loan categories. Credit card, consumer and personal loans belong to the latter category, according to ECB and other bank figures. However, these comparatively higher loan rates are partly justified by the lack of a credit bureau and central bank restrictions imposed on consumer loans. The decision to fully liberalize consumer credit announced to senior bankers by the central bank’s governor, Nikos Garganas, last week, along with the operation of the credit bureau, Teiresias, is a step in the right direction. After all, the restrictions did nothing to stop Greece from being one of the highest inflation countries in the European Union and put the brake on robust consumer lending. Despite the restrictions on consumer credit, figures show it rose by an average annual rate of 42.7 percent in 2000, 42.5 percent in 2001 before easing to 24.2 percent in 2002. Consumer credit expanded 26 percent year-on-year in March while it contracted at the same time in the eurozone. The figures show there is still double-digit growth in consumer credit but a slowdown is evident. The latter does not surprise and should be expected given the fact the consumer loans started from scratch in Greece a few years ago. The importance and growth of consumer loans is highlighted in published first-quarter figures. According to them, consumer credit, including credit cards, accounted for 12.3 percent of National Bank’s loan portfolio and mortgages for 29.7 percent. At Alpha Bank, consumer credit and mortgage loans accounted for 5.2 percent and 17.8 percent of the total portfolio respectively. Consumer credit accounted for 21 percent of the loan book at EFG Eurobank Ergasias whereas it stood at 13.5 percent at Piraeus Bank and 7.5 percent at Emporiki (Commercial) Bank. Although many express reservations about the impact of the full liberalization of consumer credit, most analysts and bankers alike agree that it should provide a moderate boost to bank income and help maintain healthy loan growth rates. Bankers, like Michael Masourakis at Alpha Bank, point out banks will be able to reach out to a wider audience, who may not be interested in taking out a small personal loan of 3,000 euros but may show interest in borrowing larger amounts to finance the purchase of a big-ticket item. A promising growth area is home equity financing, which enables somebody to put his house up as collateral, either to refinance an existing loan at a much lower interest rate or simply to finance the purchase of a consumer durable good. Taking out home equity loans for purposes other than home repairs or buying a house is prohibited in Greece. It is commonly known that some Greek banks have extended loans to their clients to be used for home repairs even though they suspect they are used to finance other purposes, such as the purchase of consumer goods. In essence, these loans are consumer loans. Finding out where the money lent is going entails high operational costs and therefore helps explain why banks have not been more forceful in finding out where the money has been spent. In addition, pooling together personal and consumer loans and taking out a home equity loan with a much lower interest rate to cut financing costs should also be expected. This may lead to stiffer competition among banks to attract the prospective customers. Although no miracles should be expected, the full liberalization of consumer credit should inject some life into Greek retail banking and help improve its growth prospects. Moreover, opening the way for home equity loans should help improve banks’ capital adequacy ratios and reduce provisions since loans using home as a collateral are considered safer. Nevertheless, it will be the correct assessment of the credit risk profile of each prospective customer which will make the difference at the end of the day, which means there is still a lot of work to be done there, given banks’ unwillingness to share information on the credit history of their clients and other obstacles raised by the Authority of Personal Data.

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