At a time when tens of thousands of Irish households are experiencing severe debt repayment problems for the first time, an important initiative between the Irish Bankers Federation (IBF) and Money Advisory & Budgeting Service (MABS) has been unveiled.
Called “Working Together to Manage Debt”, it’s a voluntary operational protocol establishing a practical response to unaffordable consumer indebtedness. Critically the concept of an organised, agreed debt settlement process – paying off less than what is owed- is recognised.
However as people frequently have loans from more than one lender, who may not all be IBF members, the protocol doesn’t cover a multi-lender debt settlement scenario.
Ireland’s debt collection law is an antiquated legal relic, reflecting Victorian societal attitudes.
Our bankruptcy laws are draconian, expensive and wholly inadequate. Until now consumer bodie’s advocacy for an alternative legal debt settlement process has fallen on deaf ears. Irish citizens deserve access to a modern legal debt settlement process found elsewhere in more enlightened, socially just jurisdictions. The joint IBF/MABS initiative is one that Government and its regulatory agencies should now move to codify in law and regulations.
Whatever about debt settlements, for many accessing credit is now almost impossible. Internationally documented, credit crisis have in almost all cases led to prolonged credit rationing lasting long after the initial crisis has passed. Bankers may have the money to lend but fearing losses and adopting risk adverse behaviours, their lending is curtailed for all but the most creditworthy of customers.
Foreign owned banks are not passing on in full ECB rate reductions, as they march to the tune of a different backer. It is understandable as British, Danish or Belgian tax payer’s funds will hardly be diverted to sustaining lower rates in Ireland. With Irish covered banks unwilling to take on others loans, creditworthy customers have become captive of their existing banks interest pricing policy. And many are paying higher rates as a result. Meanwhile one covered bank, the EBS, reflecting pressure on interest income and funding costs, is reported to be petitioning Government to increase rates charged to its existing customers. Other covered banks similarly, though not as acutely exposed are holding down rates for now. But this may not last.
Apart from higher interest rates, Irish consumers are becoming increasingly aware of their personal credit rating. While not a substantial feature of boom time banking with its ready supply of cheap, convenient credit – consumer awareness will heighten. As banks tighten credit policy, a person’s credit rating will become their passport to affordable credit. An increasing number of people may become marginalised and forced to borrow at higher rates reflecting their “risk profile”.
The dominant rating agency, the Irish Credit Bureau, which provides both an historic record of borrowing behaviour and predictive scores of future behaviour, is used by all major lenders in loan decisioning. As yet it’s too early to tell if banks will charge risk adjusted rates to different people based on their risk rating profile.
Meanwhile as Governments reform of banking regulation continues behind closed doors, IFSRA’s twin “oversight” Industry and Consumer panels have both been critical of the lack of consultation and public dialogue on regulatory reform. The consumer panel has suggested that consumer financial products should be licensed for use similar to the way in which medical drugs are regulated. That is, they should be certified as fit for use by consumers. There is much to be said for this approach which is a feature found elsewhere.
Other regulatory regimes effectively control the development of consumer risk products for example inhibiting 100% mortgages and features such as discounted rates. Opponents to product regulation, mainly bankers and industry insiders, argue it stifles innovation. But such arguments fall apart when the inflationary property price impact of larger loan to income, 100%+ mortgage and interest only lending to homeowners and amateur landlords is considered. The lending and borrowing that fuelled the property boom could have been curtailed had an effective consumer product regulatory regime been implemented.
As credit is rationed, many will be forcibly weaned off a rich diet of cheap affordable consumer credit. This may not be such a bad thing as people save to spend later rather than borrow now and pay later. But the effects of bank rationing and consumer declining use of bank credit are known.
Prolonged recessions and slow recovery paths are partially caused by prolonged bank credit rationing from bankers reluctant to turn the tap back on and consumer’s reluctance to drink from the trough. Government has yet to provide a cogent banking policy to turn the credit tap back on and get people prudently borrowing again. Its policy has not yet addressed consumer indebtedness, credit rationing and use of credit in a post crisis economy.
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