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The National Bank of Serbia temporarily eased…

Andrea Bačanek • oct 24, 2023

The National Bank of Serbia temporarily eased the status of housing loan users

At a meeting of the Executive Board held last month, the National Bank of Serbia adopted the Decision on Temporary Measures for banks regarding housing loans to individuals (“Official Gazette of the Republic of Serbia,” No. 78 of September 12, 2023). This decision, intended to alleviate the situation of housing loan users, will have a significant impact on the entire housing loan market. Below, we will elaborate on its most important aspects and potential effects.

One key point of this decision is the limitation of interest rates for borrowers who are users of the first housing loan with a variable interest rate, with a contracted amount not exceeding 200,000 euros. These borrowers will have a temporarily limited nominal interest rate for the next 15 months, starting from the October installment. Banks are not allowed to demand interest rate differences from borrowers due to the implementation of this decision. This means that these borrowers will pay lower loan installments during this period, which will ease their financial situation.

For housing loans approved until July 30, 2022, a limitation on the nominal interest rate of 4.08% has been set. This limitation will result in reduced loan installments for these borrowers, ranging from 10% to over 25%. For housing loans approved from July 31, 2022, until the date of the Decision’s entry into force, with an initial interest rate higher than 4.08%, users will pay reduced loan installments with the interest from the original repayment plan until December 2024. This measure aims to protect existing borrowers from a sudden increase in interest rates and ensure stability in loan repayment.

It’s important to note that these measures only apply in terms of limiting further interest rate growth. If variable interest rates decrease, banks will be required to adjust the installment amount in accordance with the housing loan agreement.

Additionally, the National Bank of Serbia’s decision places restrictions on housing loans granted after the entry into force of this decision. For loans with variable interest rates, banks are instructed not to set the fixed part of the nominal interest rate (the bank’s margin) above 1.1% until December 31, 2024, and after that period, this part will be determined in the loan agreement. For housing loans with a fixed interest rate, banks can approve loans with a nominal interest rate of up to 5.03%.

Another important aspect of this decision is that it allows all housing loan users, including those with fixed interest rates, to prepay their loans without early repayment fees. This measure is particularly beneficial for borrowers and can save them significant costs.

Banks are also required to provide borrowers affected by this decision with a new repayment plan and information on the application of the reduced interest rate.

While these measures are intended to prevent the negative effects of rising interest rates on borrowers, this decision has raised questions in the public about its legality and fairness. Arguments revolve around the selectivity of measures applied to a specific group of loans, as well as potential interference in contractual relationships governed by the Law on Obligations.

Furthermore, regulatory intervention in interest rates can be seen as problematic from the perspective of fairness and market freedom. The decision made by the National Bank of Serbia reinforces imbalances in the credit market and raises serious questions about the balance between state regulation and the natural dynamics of financial markets.

It will be interesting to see how banks respond to this decision. One possible reaction from banks may be to reduce interest rates on the savings of citizens and businesses. Such a step would likely be taken to compensate for potential losses in the interest rate range for housing loans. However, this could have deeper consequences for savers, as their returns may decrease.

Through this decision, banks will likely start taking legal risks into greater consideration when approving new loans. There is a real fear that regulators could influence bank profitability at any time, which could lead to a more cautious approach in approving loans. This could certainly affect the ability of citizens to access financial resources for their needs.

The problems arising from this decision extend beyond its immediate effects, raising questions about the overall dynamics of the market and whether it is fair to treat one group of borrowers favorably while others, not covered by the measures, face housing loans under unchanged terms.

It is important to understand that these measures are intended to protect citizens and ensure stability in the housing loan market. However, while the regulator’s intent is driven by protecting citizens’ interests, the question remains as to how positively these measures will impact in practice. Such a dilemma certainly presents a challenge in balancing the necessity of protecting citizens and urgent economic needs on one hand, and fairness and the principles of a free market on the other.