Belated credit deregulation needs banks to show more responsibility

Last week’s announcement by the Bank of Greece – of the abolition of the upper limit on consumer and personal loans – will be the last act of adaptation by the Greek banking market to international practice. The measure, expected to be finalized by the end of the summer, should have been put in place long ago, even before Greece joined the eurozone. The central bank’s fear, which caused the delay, was chiefly related to inflation. However, prolonging the restrictions did not have the positive influence expected: Lending rose at a galloping pace and consumer loans doubled within two years. Bankers will retort that the starting point was low – until a few years ago, bank branches granted loans only to favored customers. Furthermore, a large part of current credit is explained by the shift into the official market of a large number of loans granted by usurers and racketeers. To be sure, the central bank and the commercial banks knew well that the rapid de-escalation of interest rates was bound to lead to a credit explosion. Had the liberalization of loans been attempted in good time, the unpleasant phenomena would have been checked more effectively: Banks would, from the very first, have trained their staff and «educated» their customers in a better evaluation of the costs and risks of lending. Households would have had the time to adapt to wiser management of plastic and «fast» money; and even interest rates would have come down faster. But the worst problems lie elsewhere: After the decision by the Authority for the Protection of Personal Data, which requires the express consent of bank clients for the processing of their particulars, borrowers will again be exposed to the risks of badly planned lending. If banks do not know the total sums borrowed by their customers, they will objectively bear limited responsibility. In practice, this means bank customers will remain without the expert advice of the lender, who also has an interest in promoting performing loans. Therefore, the borrowing public is again at risk of remaining «uneducated.» The danger of excessive lending is not the only one faced by today’s borrower. In the place of the wheeler-dealers, who in the old days would «facilitate a loan through a senior bank connection,» one now finds the same type of dishonest individuals promising to find solutions for people swamped by loans they cannot service. Lawyers who used to be hired by usurers to intimidate borrowers have now been replaced by new «consumer consultants» who misguide and trap savers into irresponsible management of their finances. A combination of the above, along with the serious mistakes committed by banks themselves, creates an additional and important target for the deregulation planned by the Bank of Greece. Banks’ biggest mistakes are not related to the fine print in contracts but to the hastiness and thoughtlessness with which they entered the race to capture a piece of the lucrative consumer loan pie. Lack of properly trained staff in risk management has made the problem worse. The Bank of Greece is obviously aware of all of the above; it was for this reason that some time ago it raised the indirect provisions on bad debts, which meant a higher cost of lending for banks. The rules of the Basle Capital Accord, which will be applied internationally in the next three years, will be another step in the right direction. Until then, commercial banks must show a sense of responsibility and restraint. They must not raise their limits on personal and consumer loans. Credit facilities must only be extended to customers that a bank knows well. This is also a test for borrowers. After all, a household is a small business that must be judged via the same criteria – the ability and wisdom of its manager.