Banks get hit where it hurts

• Government wants to cap the cost of early loan repayments

• Bogdan Chiriţoiu of the Competition Council: "This measure will stimulate competition in the banking sector"

In order to avoid an increase in the number of overdue loans, the authorities yesterday approved an emergency ordinance concerning consumer loans, which allows borrowers to repay their loans before maturity, if they no longer agree with the terms of the contract, without being forced to pay oversized early repayment fees.

The emergency ordinance, eliminates the early repayment fee for variable interest rate loans. Within 90 days after the coming into effect of the bill, banks will be required to amend ongoing loan contracts to comply.

The decree provides the elimination of the early repayment fee, for variable interest loans, both for those with real estate collateral, as well as for those without this type of collateral, as well as the capping of loan commissions to 1% for fixed interest rate loans.

Moreover, customers will be able to terminate the loan agreement within 14 days.

"After the publication of this ordinance, any Romanian citizen that enters a loan agreement with a bank will have the option to cancel the contract within 14 days without having to provide any justification, meaning that they will be free to switch to banks that offers better lending terms", prime-minister Emil Boc said.

Customers that cancel the loan agreement within the established delays will no longer be required to pay the set-up fees. Moreover, under the provisions of the new bill, customers will receive a standard form which will allow them to carefully review all the costs of the loan.

Loan payments are becoming an increasingly heavy burden for borrowers who took out secured loans. The total amount of loan payments more than 30 days overdue stood at 3.99 billion lei in May, up 40% over the end of 2009, according to data from the National Bank of Romania.

The chairman of the Competition Council, Bogdan Chiriţoiu, said: "This measure will lead to increased competition in the banking system and will extend to borrowers who have ongoing loans and who will thus be able to benefit from lower interest rates. Under the new terms it will be easier for customers to refinance loans denominated in Euros, on which they are currently stuck paying 9-10%, whereas there are banks that currently lend Euros at 5% a year".

The Directive 2008/48/EC, which was supposed to be included in the Romanian legislation since June 11th, 2010, provides that the obligation of the banks to limit the early payment fee does not apply to mortgages, loans for acquiring/maintaining the ownership of a real estate property or to those of less than 200 Euros or to loans that exceed 75,000 Euros.

The chairman of the Romanian Banking Association, Radu Graţian Gheţea, said that banks will implement the provisions of the emergency ordnance, but they will continue to lobby for their point of view.

Graţian Gheţea said: "We are unhappy and surprised that the officials of the National consumer Protection Agency (ANPC) ignored our numerous phone calls and letters. We will continue to talk to their Board of Directors to make sure someone listens to our point of view. We will not go on strike, we will not obstruct the implementation of the ordinance, but we will present our point of view when the law will be put up for vote in the Parliament".

The draft bill has been drawn up in the beginning of the year by the National Consumer Protection Authority (ANPC), but expanded on the provisions of the Directive 2008/48/EC, to have them apply to all loan agreements, including mortgages, consumer loans and leasing contracts, regardless of the total amount of the loan. The decree will also apply to ongoing loan contracts instead of just those entered into after the passing of the bill.