Press Release of the Banco de Portugal on the non-extension of the duration of the temporary exceptions included in the macroprudential Recommendation for new consumer credit agreements
The Banco de Portugal has decided not to extend the duration of the temporary exceptions adopted in the context of the COVID-19 pandemic to the limits that credit institutions and financial companies should observe when granting new credit to consumers in the period from 1 April to 30 September 2020, as set forth in the macroprudential Recommendation issued in February 2018 (‘Recommendation of Banco de Portugal within the legal framework of new credit agreements for consumers’). These exceptions will thus cease to apply to new consumer credit agreements from 1 October 2020 onwards.
The temporary exceptions, as provided for in Article 10-A of the Recommendation, establish that new personal credit agreements with maturities of up to two years concluded between 1 April and 30 September 2020, intended to mitigate households’ temporary liquidity shortage situations, are exempted from regular principal and interest payments and from complying with the limit to the ratio of the total amount of monthly instalments of a borrower’s total debt to his/her net monthly income (DSTI ratio).
The decision not to extend the time limit for these exceptions was taken considering that the analysis of a sample of institutions representing around 90% of new credit to households showed that no new credit was granted under the framework in question.
To ensure that credit institutions and financial companies adopt prudent criteria when granting new credit, in February 2018 the Banco de Portugal adopted a macroprudential measure in the form of a recommendation, introducing limits to some of the criteria used by credit institutions in the consumers’ creditworthiness assessment within the scope of credit for house purchase, credit secured by a mortgage or equivalent guarantee, and consumer credit (‘Recommendation of Banco de Portugal within the legal framework of new credit agreements for consumers’).
In March 2020, in the context of the COVID-19 pandemic and with a view to pursuing the financial stability objective, the Banco de Portugal assessed the Recommendation to ascertain whether it would be necessary to change its design or calibration or if it did not clash with other measures taken at national level to address the impact of the pandemic.
Considering the abrupt and significant changes in economic and financial conditions caused by the COVID-19 pandemic, and notwithstanding the elements of flexibility already provided for in the Recommendation[i], the Banco de Portugal considered it appropriate to introduce an additional flexibility measure of an exceptional and temporary nature, with a view to ensuring household liquidity in the very short term.
Therefore, the Banco de Portugal decided to change the Recommendation, by adding a new Article 10-A, establishing that new agreements concluded between 1 April and 30 September 2020, regarding personal credit with maturities of up to two years and duly identified as intended to mitigate households’ temporary liquidity shortage situations would no longer have to comply with the debt service-to-income (DSTI) ratio limit provided for in the Recommendation, and would also be exempted from observing the recommendation of regular principal and interest payments. Article 10-A set forth that the maintenance of these exceptions would be reassessed as of 30 September.
[i] Credit agreements in the form of an overdraft facility and other credit with no defined repayment schedule (including credit cards and credit lines), as well as credit agreements for a total amount equal to or lower than the equivalent to tenfold the guaranteed monthly minimum wage (around €6,400) already fell outside the scope of the Recommendation.