New edition of Banking Code shed light on loans interest rates
Banks have used loopholes in the law to misinform borrowers about the final interest rate on loans. Sometimes financial illiteracy resulted in conflict situations about the paid interests. The new edition of the Banking Code eliminates this shortcoming, and banks will have to review their final mortgage interest rates.
On January 22nd, amendments to the Belarus’ Banking Code took effect. The amendments hold the banks liable to disclose the overall interest rate on loan agreements.
On the consumer credit market there was a situation when banks would hide the final interest rate on loans, masking it with large commissions against the background of low loans’ base rate. Banks that specialized in retail consumer loans (Delta Bank, HKbank, Trust Bank, SOMBelBank) set the base rate at 20-30% per year, while the final interest rate, taking into account sales charges, could be as high as 140-150% per annum.
The National Bank obliged the banks to disclose the overall interest rate on loan agreements. Poor financial literacy of the population often resulted in an incorrect financial assessment of the loans, leading to conflicts, which required intervention by National Bank experts following written appeals. Many nationals found themselves in a difficult financial situation due to the non-existence of the bankruptcy institute for private persons.
On January 22nd, the amendments to the Belarusian Banking Code took effect. Its article 137 “Loan Agreement” has been revised and any levy of additional charges (fees and other) on loans has been banned. According to the new rules, banks must inform about the full interest rate on loans. Banks still have some room for manoeuvre to include additional charges, but in the case of abuse, National Bank specialists may intervene to prevent further conflicts.
Thus, the consumer loans market will undergo some changes. On the one hand, banks are no longer allowed to mask high interest rates on short loans, which will reduce the overall interest rates on consumer loans. On the other hand, consumers will be able to assess their financial capabilities and their needs in loans based on real interest rates. A number of banks may lose significant profits and will have to diversify their loan portfolio and loan products to continue operations in Belarus.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.