Romania’s central bank announced on October 17 that it has endorsed tighter retail lending regulations under which the indebtedness ratio should not exceed 40% of the net income of the debtor for local currency loans and 20% for foreign currency loans.
Currently, banks set their own regulations approved by the central bank, and the indebtedness ratio (market average) is 45%-47%.
Although the central bank played down the macroeconomic impact of the decisions, the improved macro-prudential regulations will come at some cost, particularly as they come at a time of economic slowdown and will further depress consumer and business confidence.
The indebtedness ratio can be 5pp higher (45% and 25% respectively for leu and forex loans) for loans to buy the borrower’s first home, under the new regulations.
The new regulations will come into force as of January 2019. Loan requests submitted before the end of the year will be processed by banks based on the existing, milder, regulations even if the loan is extended after January 2019. Consequently, banks are expected to accept a higher number of requests in the coming months, resulting in an increase in lending in early 2019 before the negative impact on financial intermediation is seen later next year.
The central bank claims in the statement that the impact on economic growth will be “insignificant”. However, the residential market has already felt the effects of the central bank’s announcement of the tighter regulations in the summer. The banking market is expected to rein in its retail operations as a result.
Mortgage loans to households (21.3% up y/y at the end of July) and possibly also consumer loans to households (9.7% up y/y) are driving up construction in major cities and retail markets. Households’ indebtedness in some cases has reached excessive levels despite rapidly growing incomes, the monetary authority has warned. In contrast, the stock of loans to companies increased by only 3.3% y/y at the end of July, a rate that fails to offset headline or industrial price inflation.
The central bank estimates that the average indebtedness ratio accepted by banks for mortgage loans is 47% at this moment and it will decrease to 40% (45% for first homes) as of January. The average indebtedness ratio accepted by banks for consumer loans is 45%, the central bank estimates, and it will decrease to 40% as an effect of the new regulations.