ECONOMY

BoG to limit excessive lending

The Bank of Greece (BoG) intends to take measures to strengthen the credit system as the boom in credit expansion, particularly in the field of consumer credit, is a source of concern. The spreading worry is that the huge increase in consumer loans to the public, combined with the lack of an effective system for monitoring consumer behavior, puts the whole credit system in danger as the number of over-indebted households keeps rising. The BoG is planning to use the rise of the lower limit of bank provisions about consumer credit as a protective shield. This move is expected to limit the rate of consumer loan issuance (as upping the provisions will make these loans more expensive) as well as creating a strong «capital cushion» for banks. According to BoG data, at the end of October 2004, the total of consumer loans by banks reached 16.11 billion euros, showing a 38.1 percent annual increase. The rise in personal loans was «explosive» by late October, when they had reached 6.12 billion euros, an annual increase of 64.2 percent. Personal loans are considered high-risk and are often issued without supporting documentation; they account for 38 percent of all consumer loans today. Many overextended households, on the edge of being seriously indebted, recycle their debts by receiving loans from various banks with which they pay off part of their debts to other banks, etc. Apart from consumer loans, households have also received mortgage loans. The latter may be the most secure but place a heavy burden on the family budget and a rate increase could aggravate the household situation further. By late October, mortgages reached 31.4 billion euros, up by 22.9 percent year-on-year. Yet despite the amazing credit expansion of the last few years, the scope for further penetration of the banking system in the economy is great. Total lending by domestic banks as a percentage of gross domestic product only came to 66.3 percent, when the EU average is 116 percent. Similarly, loans to enterprises as a percentage of GDP was at 40 percent, compared with the EU’s 67.6 percent; loans to consumers at 26.3 percent, compared with 48.4 percent in the EU, and mortgage credit at 17.4 percent in Greece, while in the EU it was at 32.4 percent. The central bank’s worries focus mainly on the likelihood that the recent years’ fast credit expansion along with intense competition among banks have brought about several missteps by banks and risk-assessment systems. Also worrying is the fact that domestic consumers have only recently discovered loans and could abuse the scope offered by banks by overestimating their potential. Bank officials, however, do not seem too worried. They acknowledge that some households are close to being over-indebted but stress that these are a minority and cannot possibly prove a hazard to the rest.