INTEREST RATES ON LOANS TO CITIZENS AT A STANDSTILL
Bulgaria's EU-accession, no matter if in the beginning of 2007 or 2008, will not automatically result in a reduction of interest rates on loans, released by domestic banks. That should be realized by people hoping to get financing at lower prices after we join the EU. The citizens in Great Britain, Germany and Spain, for instance, draw consumer and mortgage credits at 3-4% lower interests than in Bulgaria. In the UK where mortgage loans are probably the most widely offered credits, annual interest rate on them is the range of 4.6-5%, but they are allocated only to the employed residents of that country. It is impossible for a Bulgarian, notwithstanding how much his income is, to get a credit from an English or German bank because the generally accepted rule is that these services are national and are not included in the global banking rules.
Practically, only financial services for firms do not observe national borders. While anywhere round the world those to citizens do not go beyond the perimeter of the state where the client lives and works. Moreover, current trends on international markets, exhausted by the low interest rates in recent years, are for a gradual increase of interest rates on all kinds of financial services. The reason is that the two centres on whose policies the movement of interest rates depends - the US Federal Reserve and the European Central Bank (ECB) - are raising the interest rates on their repo operations. On June 8 the ECB increased them from 2.5 to 2.75% and according to expectations, they will reach 3.5% by the year-end. On June 29 the Federal Reserve raised the interest rates from 5 to 5.25% and they will probably exceed 5.5% in the coming five months and a half. As a result of that policy
all interest rates on deposits and credits are going up
both in euro and in US dollars on international markets.
Many Bulgarians will probably wonder how that concerns operations in Bulgarian levs. It turns out that the relation is a direct one. Banks release loans to the population by money attracted from citizens, firms and credit lines from abroad, at a set price. When these accounts and deposits are in levs the interest rates which banks calculate on them are higher than in the cases when the respective accounts are in euro or US dollars. With the present increase of interest rates on international markets credit institutions in Bulgaria will be forced to pay also higher prices on the deposits and accounts in the above-mentioned currencies. Thus, the aggregate price of the resource they have attracted, especially from abroad, will be going up. These expectations were predicted back in April by BNB Governor Ivan Iskrov.
We all know that for about a year now central banks in the two main zones - the US dollar and the euro - have been in the cycle of interest rate increase. According to market forecasts, interest rates will go up in the basic zone towards which currency the Bulgarian lev is pegged (i.e. the euro). It's logical to expect that to influence our market as well, although not to such a great extent as domestic banks' margins are still bigger than in the EU, Mr. Iskrov said then.
Higher interest rates on international markets are always an occasion for
an increase of deposits
which banks make in other financial institutions. The generally accepted rule is that that kind of investments are much less risky than credits. And when their yield goes up they become more advantageous than the allocation of credits. BNB's experts, for instance, believe that its Board of Governors will eliminate all restrictions on the growth of credits only if ECB's annual interest rates on repo deals go up to exceed 3 per cent. According to expectations, at these levels banks will start investing a considerable part of their free money in deposits in other EU financial institutions and in foreign securities. That means their zip for releasing new loans will weaken.
ECB's and the Federal Reserve's policies raising interest rates is already felt on our market as well. According to BNB's statistics, as of the beginning of 2006 till end-April interest rates on short-term loans in BG levs decreased from 12.94 to 10.4% and started going up gradually afterwards, reaching 11.69% in end-June. The same tendency, although not grounded, can be observed in short-term credits in euro. Interests on them were 9.78% in the beginning of the year, going down to 7.01% in March and raising to 9.06% in end-June.
Within the first six months of 2006 interest rates on housing credits increased directly. Loans in BG levs which citizens draw for construction or purchase of real estates were offered at 6.7% interest in the beginning of the year, while it is 8.59% now. The interest rate on credits in euro rose from 7.13% in the beginning of 2006 to 7.94% now.
Clients should bear in mind that the expenses they will make for servicing a loan are not connected with the repayment of principal and interest alone. Besides them borrowers will have to pay
many and various fees and commissions
connected with the investigation of their documents, the loans' management, its pre-term repayment, etc. They are so varied that comparing the terms for the different credits becomes almost impossible. For that reason the Consumer Credit Act, adopted by the National Assembly in mid-June expressly stipulates a demand for banks to specify the annual percentage of expenses for the various kinds of consumer loans. The law will enter into effect in end-September. But presently, some bank websites show comparative data about annual percentages of costs for the loans they offer.
The annual percentage of expenses for a consumer credit of BGN7,000, repayable in five years, varies for different banks between 11 and 15 per cent. It is interesting that the annual percentage of expenses for a 5-year consumer loan of EUR3,500 is within the same range.
Concerning mortgage credits, a research of the My Money website shows that the average annual expenses were 8.25% in end-May, 2006. The comparison has been made between offers of fifteen credit institutions for a 20-year housing loan of BGN50,000.
Experts of some big Bulgarian banks share the opinion that only the strengthening competition between banks may result in a reduction of the interest rates on consumer and mortgage loans. According to them, however, if the Federal Reserve and the ECB continue to raise the interest rates, loans to citizens in Bulgaria would hardly go cheaper. Moreover, domestic credit institutions might raise both the requirements for clients' solvency and some fees and commissions for the loans they offer. So, our country's approximation to EU-membership does not mean that credits to citizens would become cheaper and more easily accessible.