It’s an inconvenient truth. The banks and consumers are struggling with non-performing loans – not because people don’t want to pay them. But because savings were drained in the deposit haircut forced on them by the Eurogroup. Because of the recklessness of the previous communist government, which failed to protect the economy and wasn’t in a position to bail out the banks during the global financial crisis. Because of the recklessness of the Cypriot banking sector which over-exposed investors to the Greek debt crisis. Because you can’t drain the economy of billions of Euros and then expect the citizens to make up for the massive hole in the accounts.
There are other reasons for the latest banking crisis of high NPLs that are only just coming to light. High interest rates, tied to non-existent benchmarks, overcharging heavily on bank accounts, forcing consumers into arrears by taking up all their cash flow. Adding huge amounts of arrears to the capital also increases the amount of interest that has to be paid. In the end, the consumer is laden down with much more debt than he or she bargained for.
Things are changing for the better recently, however. Consumer protection is improving. Bank consumers can report any abuses of their account to the Consumer Protection Service
The Financial Ombudsman is another recourse.
The service recently fined the Bank of Cyprus 170,000 Euros for unfair mortgage contracts. The contracts were not transparent, did not specify an end amount for the debt, and were unclear on interest rate charges. It was impossible to tell how much money was going into the capital and how much into the bank’s profits (aka interest rates).
Somewhere between the part where someone signs a contract with a bank and the part when they are faced with much more debt than they expected is a process that nobody understands. When you ask the bank what they base their variable mortgage rate on, there’s no answer. SPE was forced to change all their contracts because their interest rates simply floated on air and on the whims of the bank’s management, for example. A variable banking interest rate needs to be based on a commonly-used benchmark, like EUR LIBOR, which is tied to the European Central Bank key rates.
*Any interest rate is negotiable. It is simply the amount of profit the bank takes on the money they distribute from the European Central Bank.*
More concerning to consumers are predatory banking practices. Predatory lending is defined as “the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against.” Wikipedia describes it as follows:
“Predatory lending typically occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower’s ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.”
“Loans that are designed in such a way that it is almost impossible for the borrower to not be confronted at one time or another to a default of payment.
Predatory lending benefits the lender and ignores or hinders the borrower’s ability to repay the debt. All the risks are passed on the borrowers. In addition, the lenders or their intermediaries often try to take advantage of a borrower’s lack of understanding about loans, terms or finances.”
The key question in any loan is ‘how much of my monthly installment goes into the capital and how much into interest payments?’ This is the only way you can truly know how much the bank is taking as profit on the capital you’ve borrowed. You can use this information when shopping around so that you can judge which bank has the best offer.
The economy is still in a fragile state, so it’s not just the banking system that has to be wary of current and future costs. Consumers – who are the least at fault for the crises – have been drained of their resources. At some point the abuse has to end or the abusers face legal consequences.