INTERESTS ON MORTGAGE LOANS TO FALL AFTER EU INTEGRATION
Iliyan Raichev has been the head of Post Bank House Crediting Department since 2004. He holds a Master's degree in Economics of the Industry from the University for National and World Economy. He gained 13 years of professional experience in leading financial institutions such as United Bulgarian Bank, BULBANK and Allianz Bulgaria where he occupied different positions in the field of money markets and debt instruments trading, corporate and retail banking. He started working for Post Bank in 2003. He is married and has two children.
Mr. Raichev, can we talk about a boom in mortgage crediting in Bulgaria?
- We definitely can. Growth of house credits was approximately 150% in 2004, 100% in 2005, and we predict it will be 65% in 2006 which is equal to record new BGN1.3BN. I have to explain that the reduction in the percentage is provoked by the base that has grown sharply.
We expect these credits to keep outstripping all other types of credits (consumer, commercial, etc.) in the mid-term, and this trend is also being seen in the countries in the euro zone - the old and the new members.
Demand for house loans will remain very intensive, influenced by the dynamics in the real estate market, the stable macroeconomic environment and the improving financing conditions offered by Bulgarian banks. For example, past June has been the strongest month in house crediting so far.
Isn't there a danger for the population to accumulate too many debts and what is more - long-term debts?
- I'd rather say no. Indeed, house credits presuppose long-term commitment of the customer to the bank, but it is exactly this feature that contributes to the acceptable financial burden of the payments on the credit upon the budget of the household. We should note, however, that Bulgarian people live and work in a stable macroeconomic environment with permanent economic growth, relatively low inflation rate, reducing unemployment, falling interest rates and sustainably growing income. Considering the perspectives about Bulgaria's integration in the European Union I think this will be a premise for the people to serve their financial obligations without serious difficulties. In addition - the level of indebtedness of the Bulgarians is still too far from that of citizens in the European Union states.
The battle for mortgage credit customers resulted in lower interest rates, fees and commissions. Do you think this trend will continue in the future?
- The price of house credits has been falling constantly in the past years. This trend is objective considering the influence of various factors, including the pending integration in the European Union, the sharp competition in the sector, the improved quality of the bank management and therefore the management and control over the credit risk. I think interests on mortgage loans will keep falling with ease pressed by the measures of the Bulgarian National Bank which aim at regulating the crediting growth in the country, as well as by the forecasts about a slight increase in interest rates in an international scale. But they will play a retaining rather than restraining role.
We can objectively expect that, within a year following the country's integration into the European Union, the level of interests will approximate as much as possible those in the newly-accepted union member states. From this point of view it is important for the customers whether and under what conditions their financing bank commits itself to change the interests on the credits in accordance with the market dynamics. I think the time of the price war is over and customers will choose their bank on the basis of the quality of services they get.
What is the profile of the average house loan consumer in Bulgaria?
- The average household that gets a credit from Post Bank consists of two working borrowers. Their age ranges between 30 and 45 years. Most frequently our customers work on labour contracts in private companies. They are followed by officers in state-owned companies and organisations, owners or partners in private businesses and self-employed people. The average monthly net income of the household amounts to BGN800-850 for the big cities (Sofia, Varna, Bourgas, Plovdiv, etc.) and BGN550-600 for the rest of the towns in the country. The average amount of the credit is BGN40,000 with a payment period between 20 and 25 years. The majority of customers are people who buy their first residence, but there is also an increase in the number of those who seek the acquisition of a larger house or a house with merely investment purpose. Credits are most often drawn for the acquisition of ready residences, with a considerable percentage of newly-built houses, especially in big towns. Yet, credits are also drawn for repair works and improvements as well as for refinancing existing loans launched by other banks under less favourable conditions.
To what extent can the system for assessment of customer solvency impede possible negative effects for both mortgage loan borrowers and the crediting bank?
- In modern retail banking the use of centralized automated systems for assessment of the customer solvency is of key importance for the success of the business. The methodology for assessment of the credit risk and the procedures related to its application, as well as the technological (software) solutions are in principle individual for each bank. Post Bank, being part of a large financial group, was given direct access to the best banking practices for assessment of the kind. It uses its own data base and mostly the successful experience and knowledge of its owner, EFG Eurobank, in developing a model for assessment of the customer solvency. The functioning of the model contributes to the good management of the risk of our house loans portfolio and makes the crediting process extremely efficient. Of great importance for the risk regulation in assessing the solvency of a customer is also the functioning of the Central Crediting Register at the Bulgarian National Bank which provides creditors with the information they need about the customers' crediting history.
Are houses pledged for loans from forex and investment markets?
- Transactions of the kind are rather an exception at present, but as a whole there is a growing number of customers who mortgage houses in order to take a mortgage loan with different purposes, such as acquisition of agricultural land, speculations on forex and capital markets in Bulgaria and abroad, or even consolidation of the rest of their obligations on consumer loans, credit cards, lease schemes, etc. in order to reduce their monthly instalments or save the interests on them.
It is known that with the new Crediting Institutions Act becoming valid each bank within the European Union will be allowed to enter the country without problems. Don't you worry that powerful European banks will oust those that are operating on the Bulgarian market now?
- There is no reason for such worries. In fact, even now the majority of banks in Bulgaria are controlled by powerful and established foreign banks and financial groups from Italy, Greece, France, Austria. In practice, we are already competing with some of Europe's best banks. They have been applying their know-how, trade models, risk management methods and high quality products and technologies here for years. Competition can only contribute to stimulating the growth of the banking market entirely in favour of the clients - they will be getting a greater number of higher quality products and services at better prices.
The consumer loans act contains special requirements towards the advertising of banks referring to the exact definition of fees and commissions when credits are launched. Will the new clauses force you to change your advertising messages to the customers?
- I think that the Consumer Credit Act is a good model for introduction of good practices and rules of conduct in the Bulgarian banking system. I am sure it will help for increasing the trust between customers and banks and for providing sustainable growth in credits for households. Customers should receive from banks comprehensive, transparent, correct and comparable information that can help them in taking a decision to draw a credit. Observing the act, all banks will have to inform their customers about the real burden of the debt and the risks they take. The time of misleading ads is over. I should remind here that a special directive is under preparation in the European Union now that regulates the rights of people who are also borrowers of mortgage credits which, I believe, Bulgaria is going to introduce in time to the benefit of the consumers.
Will there be changes in the house crediting market in Bulgaria once the Basel II requirements are imposed?
- The introduction of the Basel II principles is not going to affect significantly the growth of house crediting. As a result from the application of new mechanisms for reporting credit risk and capital adequacy according to Basel II, banks will introduce differentiated individual price-making consistent with the specificity of the business of each debtor. Still, this refers mostly to corporate customers. Most banks will be forced to increase their capital and make great investments in the acquisition of information technologies which will probably question their profitability and stimulate the process of further transformations on the domestic banking market.