Bank of Israel's position on implementing the new directive on credit arrangements

25.6.2006

Bank of Israel's position on implementing the new directive on credit arrangements

In a statement today, the Bank of Israel clarified that Directive 325 on Credit Arrangements was both essential and important to the economy and there was no reason to postpone its implementation. It was intended to remove the great uncertainty that currently exists among customers regarding banks’ honoring their debits, to deal with the proper conduct of banking business, and to improve the payment ethic in the economy.

Yoav Lehman, Supervisor of Banks said: "There is no need nor justification to postpone implementing this directive, as there is no reason that the implementation should cause bank customers financial difficulties. This is particularly so in light of the fact that on several occasions, both in writing and verbally, management of the banks have clearly stated that they intend to guard against harming customers while implementing the directive."

Banking Directive 325 on Credit Arrangements is essential and important to the economy. It was intended to remove the great uncertainty that currently exists among customers regarding banks’ honoring their debits, to deal with the proper conduct of banking business, and to improve the payment ethic in the economy.

The current practice in Israel of persistently extending credit in a checking account beyond the credit framework was not acceptable elsewhere, and that it had two significant disadvantages from the customer's point of view:

One: The bank customer pays a very high interest on the credit beyond the agreed limit; Credit beyond the limit is almost always the most expensive in the banking system. In practice, running a bank account which is continually extended beyond the agreed overdraft limits is similar to receiving a loan of no fixed repayment period but the interest on a loan is considerably lower than that on credit beyond the agreed limits. A large proportion of bank customers were not aware of what interest they were paying.

Two: Currently there is no certainty that the bank will honor checks drawn on an account which has deviated beyond the agreed credit limit, nor any of the other debits. The return of debits due to lack of cover incurs a bank charge, and additional expenses, and could cause inconvenience to the customer, including failure to meet liabilities, thereby exposing the customer to legal action. The return of bounced checks could also lead to restricting a bank account according to the Checks Without Cover Law. This structural uncertainty leads to a situation of dependence on bank clerks and incidents caused by the temporary absence of one clerk or another, or following the change in bank branch personnel.

These problems and others arise in a situation of credit deviation beyond the agreed framework and not in a situation of managing an account within a framework. We believe that launching this directive will solve such problems.

It is important to stress: This directive does not in any way force the customer or the bank to reduce an overdraft. This decision remains in the hands of the customer and the bank. Neither does the directive oblige the bank to return a check or other debit; this decision also remains with the bank. (The bank may increase the credit framework thereby permitting it to honor the check without creating a deviation beyond the credit limit).

There is therefore no reason that a business or household should suffer from any change in the availability of credit as a result of implementing the directive. There is nothing in the directive that obliges a bank to reduce the credit it makes available to any customer, and if the bank chooses to do so for its own reasons, then it does so without any connection to this directive.

On this point, Yoav Lehman, Supervisor of Banks, stresses: "There is no need nor justification to postpone implementing this directive, as there is no reason that the implementation should cause bank customers financing difficulties. This is particularly so in light of the fact that on several occasions, both in writing and verbally, management of the banks have clearly stated that they intend to guard against harming customers while implementing the directive."

The Supervisor of Banks, as one may recall, issued his position on the banks' managements last week, in which he demanded that the managements instruct their staffers not to harm any business or private customers, and to help them gradually through the implementation of the directive. It is stressed that the directive grants the banks' management the possibility and the tools to be flexible in their treatment of their customers. The Supervisor made clear in his statement that a customer––whom the bank had allowed for a period of time to deviate from his credit arrangement without warning him that it intended to cancel or reduce the credit arrangement––should regard this deviation from the limit as an integral part of his credit arrangement. The banks are expected to grant such customers, if needed, a temporary credit arrangement that permits the continuation of normal activities as described above, until the credit arrangement is brought down to a level that the bank is prepared to permit, and to act with extreme caution so as to avoid any damage to the customer that could prove irrevocable.

The banks are known to have extended credit arrangements unilaterally to a sizeable proportion of their customers who have yet to reach an agreed arrangement with the bank, and they may also do so with customers that find themselves beyond their credit limits come July 1. The Supervisor added, however, that it was preferable for customers not to rely on this alternative, and to reach a credit arrangement with the bank that is suitable to their needs and that arranging a credit framework instigated by the customer would enable the customer to improve terms and avoid unnecessary expenses on returned debits and checks. Customers who did not manage to negotiate and obtain the optimal terms for themselves by 1 July can do so after that date, and can even use the new arrangements that make it easier to transfer to another bank if the latter offers more attractive terms.