Nikolay Cvetanov for Capital Daily: “The amendments to the Credits Act will have negative economic and social consequences”, April 2014

Interviewed by Rosen Bosev

How would you comment the amendments to the Consumer Credit Act and, in particular, the amendments made between the first and the second reading?

 Naturally, the idea for a stricter regulation of the conditions for granting consumer credits and limiting the preconditions for abuse and misleading the consumers is justified and correct from an economic and social point of view. For this reason consumers and companies granting consumer credits agreed to the idea for amendments to the legislation. In this connection reasonable and constructive proposals for changes in the regime and structure of the capital, requirements to the professional qualifications of the management, proving the origin of the funds and other requirements to the shareholders were publicly discussed, among which the proposal that all credits, including these below BGN 400, shall fall within the scope of the Consumer Credit Act. Such measures would in practice result in better regulation of the consumer credits market and limiting the number of cases where participants with unclear sources of financing, without experience in the field and applying illegal methods for collection of outstanding credits enter the market.

Subsequently, surprisingly to all, without any economic or legal justification in the explanatory memorandum to the draft law, but also without any public discussion, first a proposal was submitted to amend the Consumer Credit Act, which envisaged non-market mechanisms for regulation – introduced a ceiling on the interest rate calculated through the annual percentage rate (APR), and then, between the first and the second reading, it was proposed to further amend this draft amendment by introducing retroactive effect of the interest rate, on which a ceiling was imposed in a non-market manner.

The danger in this case also stems from the fact that the measures proposed in the last minute not only violate generally accepted legal principles, not only have not been coordinated with the public and even the business, but also fundamentally contradict the principles of the open market economy and the imposing of the rules of the free competition. These measures would also indirectly result in a significant distortion of the consumers’ interests, in particular their access to legal borrowings, including to deterioration of the quality of services related to consumer credits. Last but not least, the discussed retroactive effect of the law creates a trend to unstable legal environment for business development. Just as an illustration of the above – in order to protect the rights of citizens in Bulgaria and create a stable environment, the Constitution prohibits retroactive effect of criminal law.

What would be the direct effects both on credit institutions and on consumers if the amendments are voted?

 Since the measures discussed are not economically consistent with the levels of costs and risks related to the granting of consumer credits, which in turn define the interest rate and the amount of the fees accompanying the service, it is very likely that the participants aiming at providing services in strict compliance with the law will leave the Bulgarian market. Of course, this means that only structures operating closer to the grey sector would remain in Bulgaria and they would offset the loss resulting from the introduced threshold of the interest rate with illegal means, such as not declaring income and other methods of concealing and not declaring taxes due, mostly by speculations with the collection of borrowings, as quoted in the media.

The adverse consequences, in which the amendments voted to the Consumer Credit Act would result, also include: depriving a large portion of the population from access to financing and social exclusion of this population, driving this business to the grey sector resulting in absence of possibilities for regulation, imposing “brutal” conditions on customers, reduction in tax revenues and revenues from social insurance contributions for the government, thriving of the business of pawnshops with high interest rates, laying off of thousands of employees of non-bank financial institutions, respectively burdening the budget with the payment of unemployment benefits, serious shocks in the small family business and the operations of sole traders, which use these credits for working funds, crisis liquidation of the existing loan portfolios and collection of credits, which will result in liquidity crisis and social explosion. It is particularly important to note that according to public statistics, despite the various banking products and the increased competition in the banking sector, in 2013 non-bank financial institutions have granted loans amounting to about BGN 1.8 billion.

In other words, the demand for such type of financing will not vanish since the needs of consumers who cannot get bank credits will remain unchanged. Banks will most likely not be able to meet this demand, as the profile of these customers does not meet their strict and regulated by the BNB policies – these are usually clients without official income, with multiple loans and bad credit record. Precisely the high risk of failure to repay the amounts received and the high costs associated with the subsequent collection of these risky loans predetermine the need for higher levels of the annual percentage rate (APR) applied to them. According to our data, the potential users of the so-called fast loans are currently about 10% of the population in working age and about two million pensioners. The latter social group is at this stage excluded from financial services of banks. The inability of these people to receive any financial services whatsoever in the future would mean that these consumers will be excluded from the market of goods and financial services, which in turn would mean social exclusion.

Several Members of Parliament propose that the amendments should have retroactive effect. How would you comment this and what would this result in?

The introducing of the maximum percentage of APR, at that with retroactive effect (including with regard to already concluded contracts), will disrupt detrimentally the financial position of non-bank financial institutions that have built their business plans and have respectively calculated the credit escalation based on the market risks and projected income and expenses. If these companies are deprived ex lege of the opportunity to realise the planned income regardless of the already incurred costs and the amounts granted in the form of credits, including under already concluded contracts, they could be put in a position of not being able to service their current liabilities.

What other mechanisms can be used to protect the consumers’ rights?

To achieve the purpose of the amendments in the law, namely to curtail the vicious practice associated with usury or excessive profits at the expense of poor citizens, simpler, non-populist but operating measures can be introduced, such as raising the requirements for licensing, capital and shareholders of companies providing fast loans, mandatory annual audit of financial institutions, introduction of a cap on interest rates and fees on consumer loans in case of default, restriction on charges for credits in line with the small size, the short term of the loan and the client risks – for example, interest rate (appreciation) of 50% for the term of the loan, etc. Still, in order to introduce any of these measures it would be necessary to conduct a preliminary economic analysis of the market on the basis of which to determine accurately the applicable limitations that encourage honest businesses to operate in the market and develop it. This is the only way to easily recognize speculators and achieve the objectives of curtailing the prerequisites for abuse and misleading of consumers.