Although the Directive is still being discussed, it is clear that the Central Bank intends to correct the ‘idiosyncrasies’ in the lending practices of the banks by ensuring that they become professional and diligent when granting loans.
The basic philosophy of the draft Directive is that lending has to be based on a borrower’s ability to repay a loan rather on collateral as highlighted in the Pimco report.
Banks will now have to consider the income of borrowers and loan repayments should not 35% of the monthly income of private borrowers or their estimated monthly savings.
For a loan to purchase a first home, the loan should not exceed 80% of the property’s value and for other properties the loan should not exceed 70%.
Private borrowers will have to provide a wealth of information, including confirmation of their employment, originals of the last quarter’s wages/salary payment slips, bank statements, income tax certificates, certificates of tax payments for the last two years and other documents.
For loans in a currency that is different to the borrower’s income, credit institutions will be required to provide borrowers with adequate information regarding the risks involved in foreign currency lending to enable them to take well-informed and prudent decisions.
When lending to developers, credit institutions should ensure that its staff have the appropriate experience, qualifications and expertise to deal with applications. Furthermore the institution will have to ensure that the loan is used for its intended purpose and that it monitors the progress of work.
Further reading
Draft Directive Issued to Credit Institutions on Loan Origination Processes.