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Press Release of Banco de Portugal on the macroprudential Recommendation on new credit agreements for consumers in the context of the COVID-19 pandemic

The COVID-19 pandemic has changed the national and international economic and financial conjuncture in an abrupt and significant manner. In this context, for the pursuit of its financial stability objective, Banco de Portugal, as the national macroprudential authority, has assessed whether the macroprudential Recommendation in force remains appropriate. One concern in this analysis was the need to change the design or calibration of the Recommendation, and whether it does not collide with other measures taken at national level.

The novel coronavirus pandemic will represent a very severe, although temporary, shock, and thus it is essential to ensure in the very short term that households and non-financial corporations have liquidity, while continuing to anchor credit standards in the medium to long term.

The design of the macroprudential Recommendation within the legal framework of new credit agreements for consumers has considered flexibility elements that can now be used in a stress scenario. Part of the new credit agreements concluded with consumers are not covered by the Recommendation and may be relevant in the current context, as follows:  

  • Credit intended to prevent or address arrears situations is excluded, thus giving greater flexibility to the design of these agreements [1]
  • Credit agreements in the form of an overdraft facility and other credit with no defined repayment schedule (including credit cards and credit lines), which can be quite important in the context of temporary liquidity shortage, are also excluded.
  • Credit agreements for a total amount equal to or lower than the equivalent to tenfold the guaranteed monthly minimum wage (around €6,400) fall outside the scope of the Recommendation, and can also be used for meeting immediate liquidity needs of households. 
  • These exclusions are added to the exceptions already existing to compliance with the DSTI ratio (debt service-to-income ratio, i.e. the ratio of the total amount of monthly instalments of a borrower’s total debt to his/her net monthly income), which allow for 5% of the volume of new credit to be granted to borrowers with no or very low income, since under these circumstances the DSTI ratio will not have a limit.

However, in the current environment Banco de Portugal has decided that personal credit with maturities of up to two years and duly identified as intended to mitigate households’ temporary liquidity shortage situations will no longer have to comply with a DSTI ratio limit and is also exempted from observing the recommendation of regular principal and interest payments.  

The amendment to the Recommendation published on 31 January 2020, which enters into force on 1 April, shall be maintained. It provides for a reduction of the maximum maturity of personal credit to seven years, with the exception of 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. This amendment does not compromise the capacity to address households’ temporary liquidity shortages. 

Finally, it should be clarified that the Recommendation is not an impediment to the application of a moratorium to address households’ temporary liquidity shortages, in the context of the measures to tackle the impact of COVID-19. The same applies to moratoria that banks have been granting on a voluntary basis.

[1] A fundamental issue, although microprudential in nature, is the treatment of this credit for provisioning purposes, in particular the application of IFRS 9. In this context, the SSM has issued a recommendation for banks not to act pro-cyclically and to take advantage of the transitional provisions of IFRS 9.