Article 42 of the Banking Act has been amended to allow banks to seize a debtor’s property and demand repayment of the full sum of a loan even if only one installment of a loan is in arrears.
The change, which was given no publicity at the time, was approved by Parliament on August 22 at the request of the Association of Commercial Banks (ACB).
The much tougher line now made possible led to a furore in the Bulgarian-language media but ACB chairperson Levon Hampartzoumian said that it was meant mainly to strike a new and better balance between the interests of debtors and creditors.
He indicated that the new measure would not be used as a first resort.
“If there was a policeman with a loaded gun when you ran a red light, you would not expect him to shoot you, would you?” Hampartzoumian said in an October 9 interview with private national television channel Nova Television.
Bulgarian National Bank (BNB) said that, while it had not initiated the amendment, it supported it.
“Applying for credit is a right, not an obligation,” BNB said in response to media reports about the amendment. Commercial banks, in turn, had the right to protect their own interests and those of their investors. The collection of payments on loans was directly linked to protecting these interests, BNB said.
“A high rate of collection on loans guarantees the stability of the banking system and the security of investors’ savings. BNB will continue to defend and to build up a stable banking system with the conviction that a stable banking system is the most secure guarantee for the protection of the interest of every Bulgarian citizen,” the central bank said.
Bulgarian-language media reports in the week ending October 6 quoted what they said were sources in the finance sector saying that the reason for the amendment was the huge amount of bad debt run up by some large-scale new hotels in Bulgaria.
The ability to confiscate property was meant to encourage these bad debtors to bring their payments up to date.
The amendment effectively negated a January 2005 Supreme Cassation Court ruling that warrants would be issued only after three installments had been missed. Debtors could be summoned only to pay the sum due, the court ruled.
Hampartzoumian told Darik News that conscientious clients would not be at risk if they delayed one or two payments. If a client was temporarily unable to keep up payments, the creditor bank would first offer a revised, more suitable payment schedule, he said.
Banks would use their newly-gained power only in extreme cases.
Meanwhile, the Consumer Lending Act came into effect as of October, obliging banks and leasing companies to announce the annual percentage rate of their products.
According to an October 2 report in Bulgarian-language daily 24 Chassa, the change applies to loans from 400 to 40 000 leva. The law also limits the penalty fees for preliminary repayment of the loans. The law stipulates that customers cannot be obliged to secure loans with promissory notes.
The newspaper said that United Bulgarian Bank, Postbank, ProCredit Bank and Raiffeisenbank were among the few that had online calculators for the annual percentage rate. FIB, Unionbank, Municipal Bank and Central Cooperative banks give examples how to do the calculation.
On September 29, Finance Minister Plamen Oresharski said that there was no indication that Bulgaria’s economic situation could lead to a chain bankruptcy of banks.
Reporting from Parliament, Bulgarian news agency BTA quoted Oresharski as saying this in reply to a question by Mincho Hristov MP (independent) about the Finance Ministry’s policy on limiting the growth of foreign debt. Hristov asked if it was possible that there would be a financial crisis like that in 1996-1997 and chain bankruptcies of banks.
Oresharski said that in January-June 2006, Bulgaria’s economic growth reached a record high of 6.1 per cent and growth in the second quarter (March-June) was 6.6. per cent. Foreign investments in the first six months added up to about 1.6 billion euro, also a record in the past 20 years.
The current account deficit was larger than the projected one but this was not unexpected, given the price level of oil and the increase in investments, which had exceeded estimates, Oresharski said.
The gross foreign debt, amounting to 16 billion euro, was large, he said. However, there had been a drop in Government and Government-guaranteed debts, the total of which had steadied at a level below 30 per cent of GDP, while in 1997 Government debt alone was as much as 130 per cent of GDP.
Oresharski said that there had been an upward tendency in private debt in recent years, which could be attributed to the improving competitiveness of Bulgarian companies that had won the confidence of financial institutions on the one hand, and by the consolidation of Bulgarian companies’ relations with foreign partners, Oresharski said.
No doubt this meant some risks in the medium term but the debt had not reached proportions that could give ground for serious fears, he said. Oresharski said that any measures to restrict lending would hinder enormously enterprise and growth.
