The National Bank of Romania (BNR) announced last week that it had been consulted on a scheme designed to cut repayment rates for over 900,000 individuals, and had provided statistical data and evaluations, but denied the scheme had been drawn up by its specialists.
The government’s intention to lower individual borrowers’ loan repayments has put the future of the EUR 4 billion stand-by agreement with international lenders on the line, after President Traian Basescu said he would not sign the letter of intent with the IMF, if this provision along with a new fuel excise tax were not scrapped.
Prime Minister Victor Ponta said the agreement with international institutions is “in a somewhat suspended state” after the president told him he would not sign the agreement with the IMF.
Speaking on B1 TV last week, the president said that the IMF mission to Bucharest was wrong to have accepted the scheme, and that the institution had not been previously briefed on the measure.
“Electorata (e.n. term used to describe the repayment facility by combining elections and bank rates) is a fake because people will pay more, as the interest payments are not taken into account and the reimbursement term is prolonged. In effect, all Romanians will eventually have to pay for those that cannot meet their repayment deadlines,” said President Basescu, quoted by news portal www.hotnews.ro. “I want the National Bank of Romania (BNR) to immediately drop the practice of being controlled by a corrupt government.”
He added that the idea of lowering the loan repayments came from the BNR, an allegation that was rejected by the central bank in a statement.
“The program to stimulate consumption through fiscal measures (which facilitates a rescheduling of bank loan repayments for the next two years for individuals with income below the medium wage) has not involved and will not involve, from the side of the BNR, any kind of monetary or banking decision,” said the central bank.
According to Mediafax newswire, the draft bill seems to have been written up by or with support from the BNR.
The BNR added that the scheme was the brainchild of Liviu Voinea, the delegate budget minister, pointing to an article by the minister that was posted on a Financial Times blog.
In the blog, Voinea says the country is set to offer an income tax credit of up to EUR 45 a month in 2016 and 2017 for low- to middle-income borrowers to reschedule their loan repayments. This would pay half of their debt service charges in the next two years, provided the measure is implemented in April, as announced by the government.
“This would allow heavily indebted low- to middle-income households to escape the debt trap, supporting economic growth,” wrote the minister.
The current structure of the draft bill requires individuals to negotiate the terms of the scheme with their banks. In addition, the scheme is optional for borrowers and lenders. These measures have been backed by experts at the BNR. The banking watchdog has been involved in discussions with teams from the Ministry of Finance, IMF, European Commission and World Bank.
Banker says scheme has caveats
Steven van Groningen, president of Raiffeisen Bank, called into question the scheme’s impact on the state budget, which would have to be paid by taxpayers.
“If I understood right, this is a measure that would allow customers to have a lower repayment rate for a certain period of time, which would be offset by a bigger repayment rate in the future. The higher rate would be compensated by some fiscal measure,” he told reporters last week.
“As a taxpayer, my first question is, okay, this means that part of the state budget from the future is used in advance to say that we are not enforcing a fiscal obligation at this moment, to allow customers with certain bank loans to pay less on the short term if they want to,” he added.
van Groningen says customers already have the option to negotiate a restructuring program with their banks, provided that certain criteria are met. He said that a customer enrolling in this system may either have to make repayments for longer or make a higher repayment on the bank loan.
Dragos Anastasiu, president of Eurolines, the transport and tourism group, told BR the reduction of repayment rates represents an “inequity” from what he has read about it. “The intention is good but I think an impact study needs to be done, and maybe they are doing it.” He suggested this study be done by an independent expert.
Although representatives of the government have stated that the repayment scheme should also help banks by stopping the formation of new bad loans, aside from propping up consumption, it may include additional risk for lenders.
“The reduction of repayment rates is in principle a good measure for the economy in itself. The only issue may emerge if banks do not have a greater risk issue than it may appear at first sight,” Mihai Marcu, president of Romanian Business Leaders, an association supporting projects in education, entrepreneurship and governance, told BR.
“Usually, loans that have a grace period have a higher default rate than those that do not have this period,” stated Marcu, who has worked in the banking sector for a decade. “You are educating a customer to pay less money (…) then you burden him or her again. This is not necessarily recommendable from the point of view of the risk.”
Nonetheless, he says the measure should be good for the economy as more money will be funneled towards consumption. According to PM Ponta, some EUR 900 million should move from the banking system into the economy, if all eligible individuals enroll in the scheme.
“Everybody stands to gain from this measure. It will boost the economy to such a rate that even those paying for this measure will have more money at the end of the day. This is a measure with a strong impact in terms of boosting the economy,” says Marcu. He added that the economy may grow by 5 percent in 2014, provided this measure is implemented this year.
Marcu commented that one measure with far-reaching effects on the economy would be the reduction of the social security contributions paid by companies, because this would also support the labor market.
Mihai Bogza, president of the Foreign Investors’ Council (FIC), declined to comment on the scheme, claiming he did not have enough information on the initiative.