A public hearing on the proposal for the Financial Operations and Pre-Bankruptcy Settlement Act (ZFPPN), which took place from March 4 to 19, 2014, has been completed. Among other things, there was a discussion about redefining the default interest rate on natural persons’ financial liabilities.
The aim of the law is to reduce the default interest rate
The Law on Interests provides for the calculation and payment of default interest when the debtor is late in fulfilling his monetary obligations. The aim of the law is to simplify the calculation and reduce the default interest rate. The agreed interest rate on citizens’ credit obligations may not exceed the statutory default interest rate applicable at the date of the contract.
Example: The ceiling for consumer loans as of January 1 is limited to 11.0% (statutory default interest of 12.0% minus one point) and to housing 9.0% (statutory default interest of minus three points).
The discount rate is not a reflection of the real situation in the money market
The default interest has a role to play in terms of financial discipline and therefore should not be too low, but the current level is too high. In the absence of a widely accepted benchmark interest rate, the calculation of the default interest rate has been determined using the discount rate of the Croatian National Bank as a base. In the relationship between a natural person and a financial institution, the statutory default interest is expressed as a discount rate plus five percentage points. The CNB discount rate at 1 January 2014 was 7.0%.
Is there any hope that the system will take care of citizens?
The discount interest rate is a monetary policy instrument by which the CNB influences the level of monetary circulation. Therefore, it is inappropriate as a reference interest rate for calculating the default interest rate because it is not a relevant reflection of the real situation on the money market.
For the aforementioned reasons, no discount rate was taken as the basis for calculating the default interest rate as the basis for calculating the default interest rate. The reference interest rate is determined based on the real interest rates of the ZIBOR (Zagreb Interbank Offered Rate) money market. In practice, banks primarily apply the six-month ZIBOR as a reference interest rate to determine the amount of the variable portion of the interest rate on loans to citizens in kuna.
According to the bill, the benchmark interest rate is calculated by reducing the average interest rate on medium- and long-term loans by one percentage point. The statutory default interest rate is the same as the reference rate plus 7 percentage points.
Example: For the first half of 2014, the average reference rate on overdrafts is 4.35%. Increasing the reference rate by seven 7 percentage points gives a default interest rate of 11.35%, which means that a maximum interest rate of 10.35% can be agreed on overdrafts, or one percentage point less than the default interest rate.
The introduction of the Euro as a national currency
The question arises as to what will happen when Croatia renounces monetary sovereignty and adopts the euro in due course. The default interest rate of the European Central Bank will then be used to calculate the default interest rate, based on the average Euro Interbank Offered Rate. Croatia ranks among the EU member states with a higher rate of interest on overdrafts, and so does non-purpose loans.
Example: In Slovenia, the interest rate on cash loans is 7.0% and in Germany 6.0%, which is primarily due to low rates in the Euribor market. Housing loans in the euro area are almost twice as cheap as in Croatia, but they are unfortunately excluded by this proposal.
Changes made by law
It has long been necessary to define the upper limit on interest rate growth, taking into account the real value of money. The draft law binds contractual interest at a statutory rate of interest and cannot exceed it. The CNB is also required to set an average interest rate for a period of one year, on the basis of which the reference rate will be calculated.
Author: Ana Munch “Image courtesy of [adamr] / FreeDigitalPhotos.net”It should be emphasized that this law does not regulate the level of contractual interest rates on housing loans and other consumer loans . Other purpose loans (education loans, car loans, etc.) and non-purpose loans (cash loans, mortgage loans, etc.) are covered . saving citizens. It is clear that citizens cannot finance their livelihoods without banks, but it should be taken into account that bad bank loans also imply poor citizens’ savings. The proposed amendments to the present Act seek to provide citizens with adequate protection and a more equal position with banks. The bill on interest has passed a public debate and may soon be in session.