Norway sets credit limits for booming consumer loan market
Norway stepped in to limit the growth of high interest rate consumer loans and credit card debt to protect the economy from ballooning household leverage amid rising interest rates.
The government announced new temporary regulations that banks and lenders will need to comply with by May 15, largely formalizing earlier guidelines from the financial regulator. The rules will be in place until end of 2020.
The limits won’t allow banks to give loans to people who can’t be deemed to handle a 5 percentage point rise in interest rates on their overall debt. Banks also can’t provide consumer loans to people whose debt exceeds five times their annual income. Five-year down-payment plans with monthly payments will be imposed on all debt.
Norwegian debt levels are at a record high after years of rock-bottom interest rates. The central bank in September raised rates for the first time in seven years and has flagged more increases will come this year.
Consumer loans have expanded twice as fast as overall debt levels, giving momentum to a string of companies including Instabank ASA, Norwegian Finance Holding AS and Komplett Bank ASA. While consumer loans only make up 3 percent of total debt, they account for 14 percent of interest payments, the Finance Ministry said.
“The historically high household debt is one of the most crucial vulnerabilities for the Norwegian economy,” the ministry said.
Banks will be able to use some flexibility on 5 percent of their loan portfolio and credit card debt under a 25,000 kroner limit will not be affected.
“We consider the formalization highly expected, but the 5 percent quota leaves the bank with slightly more flexibility than in our base case,” DNB ASA’s financial team said in a note. Unsecured lending growth will continue to slow and “further measures” could be implemented if the new rules “prove inadequate,” they said.
Norwegian Finans fell about 0.2 percent in Oslo while Komplett was up 0. 5 percent.