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Press release: amendment to the macroprudential Recommendation on new credit agreements for consumers

In its capacity as national macroprudential authority, in July 2018 Banco de Portugal implemented a macroprudential measure in the form of a Recommendation on new credit agreements for consumers, in particular credit relating to residential immovable property, credit secured by a mortgage or equivalent guarantee, and consumer credit. The Recommendation introduces limits to some of the criteria that credit institutions and financial corporations should comply with when assessing the borrower’s creditworthiness. Thus, it aims to ensure that institutions do not take excessive risks when granting credit, so as to reinforce financial sector resilience to potential adverse shocks and encourage borrowers’ access to sustainable funding, minimising default risk.

In the past two years Banco de Portugal has been monitoring developments in credit granting activity to ensure the effectiveness of the Recommendation. In this sense, the maintenance of the upward trend of the average maturity and average amount of new consumer credit, in particular personal credit, may pose an increased risk for the financial system, as it implies that borrowers will be exposed to fluctuations in the business cycle for longer periods. These developments occurred amid: a still high household indebtedness level; a protracted very low interest rate environment, which may encourage search-for-yield behaviour materialised in an easing of credit standards; and high consumer confidence, supported by expectations of continued growth in disposable income that strengthens credit demand. However, the current economic environment is characterised by high uncertainty and a slowdown in economic activity. In fact, projections for economic growth published by Banco de Portugal and the main international organisations have been revised downwards, with risks to economic activity mostly on the downside.

Hence, given the risks seen in the current environment, in its capacity as macroprudential authority and by deliberation of the Board of Directors of 29 January 2020, Banco de Portugal has decided to reduce the maximum maturity of new personal credit to 7 years. The exception is credit for education, healthcare and renewable energy – which will continue to have a maximum maturity of 10 years –, provided that these purposes are duly evidenced. The definitions of personal credit and car credit correspond to those provided for in Instruction No 14/2013 of Banco de Portugal. 

In addition, and to contain potential unwanted effects resulting from the introduction of an upper limit of 7 years to the personal credit maturity on the level of the ratio of the monthly instalment amount calculated with all the borrower's loans to his/her income (DSTI – debt service-to-income). In this sense, the exceptions provided for in the Recommendation for granting credit to borrowers with a DSTI ratio above 50% will be reduced to closer to the value currently used by institutions. Thus, up to 10% of the total amount of new credit granted by each institution may have a DSTI of up to 60%, continuing to allow institutions to consider other important aspects for assessing the borrowers’ creditworthiness that are risk mitigating factors. The 5% exception to the DSTI ratio limits will be maintained. As with the previous process for defining the macroprudential measure, Banco de Portugal consulted the Associação Portuguesa de Bancos (APB), Associação Portuguesa de Leasing, Renting, e Factoring (ALF), Associação de Instituições de Crédito Especializado (ALF) and Associação Portuguesa para a Defesa do Consumidor (DECO) with regard to this revision of the Recommendation on new credit agreements for consumers. The National Council of Financial Supervisors (CNSF) was also consulted in accordance with the applicable law.

These changes will enter into force as of 1 April 2020.