Bank loans are compromised in Romania after cap on interest rates, says ARB president

Anca Alexe 01/03/2018 | 14:32

Capping interest rates will lead to bank loaning being compromised in Romania, said Florin Danescu, president of the Romanian Banks Association (ARB), at a conference on Thursday. He noted that the measure could affect both low-income potential clients, as well as high income ones.

Danescu said that in the banking industry, the cost of a loan is made up of several elements and that a capping of interest rates would not allow their reduction unless the loan is reduced. Therfore operational expenses can no longer be reduced after a 10-year period in which banks have been optimising costs.

Banks have reduced staff by over 25 percent, their branch networks by over 25 percent, and in conclusion, these cost elements can’t be cut anymore. Other expenditures are the deposits obtained from clients and the capital, but they don’t pose any opportunity for reductions either.

One element that could be reduced is risk, according to Danescu: “The third cost element and the most important from the perspective of this legislative project is the non-performance level or the risks banks take. As the price will be fixed and it will be lower, the interval of non-performance needs to decrease. In conclusion, higher risk clients who could have got a loan today will no longer be able to get that loan.”

Danescu also said that it is possible that we will see negative interest rates in Europe. The ARB president said that with a key interest rate of -1 percent, the interest rate for loans will be -2.5 percent.

“We need a dialogue that is rational, less political, because the economy doesn’t really do politics”, he added.

Florin Danescu also said that if the demand for mortgages disappears or diminishes significantly, it is possible that the price of properties also drops since there won’t be any demand through loans.

This week the Senate voted for the legislative proposal to change the Governmental Order regarding the legal remuneration and penalisation interest rate for money liabilities, establishing that the interest rate for mortgages cannot be more than 2.5 times higher than the BNR key interest rate.

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