Banking Supervision Department follow-up on the arrangement of credit lines in current accounts and overdraft facilities in the banking system

26.4.2006

Banking Supervision Department follow-up on the arrangement of credit lines in current accounts and overdraft facilities in the banking system:

	By the end of March 2006 credit lines had been arranged in 86 percent of the private customers' accounts (compared with 75 percent at the end of February). Most of the improvement was due to the banks' unilaterally making credit lines available (30 percent in March compared with 23 percent in February).
	In the business sector the improvement was slower––80 percent of the accounts were covered by an arrangement (up from 75 percent in February). Some 78,000 business accounts, of which 52,000 are accounts of small businesses, still do not have an agreed credit framework.
	The share of accounts in which the credit limit is exceeded remains high, and has not improved from its level of 23 percent in previous months. The share of business accounts exceeding their credit limit is very high, 40 percent, almost double the 21 percent in private accounts.
	The problem is particularly acute among small business customers of the banks: only about 4 percent of them have been granted credit limits unilaterally by the banks. The combination of the lack of agreed credit frameworks for business customers and the high rate of those exceeding their existing credit limits means that these businesses are likely to suffer adverse consequences in about two months if they do not arrange credit lines with their banks in the near future, as the excess credit is called in or is cancelled by an alternative financing plan.
	The Supervisor of Banks calls upon business and private customers of the banks who avail themselves of credit in their current accounts or overdraft facilities to compare the terms and prices being offered by the different banks, to negotiate, and in the near future to agree on a credit framework that meets their requirements. In any event it is important even now not to exceed the authorized credit limit (and to maintain a sufficient safety margin below the limit) in order to avoid unnecessary expenses and difficulties from 1 July, when it will no longer be possible to honor checks and other debits on accounts that are in excess of the credit limit.
The Banking Supervision Department continues to monitor the progress made by the banking system regarding the management of lines of credit in current accounts. In this context the Department today published the up-to-date figures as at the end of March 2006.
The data show that progress was made in March in the process of arranging credit limits. Of 3.2 million current accounts and overdraft facilities in the largest five banks for which a credit line is required (accounts in which customers may go into overdraft, even if they do not actually do so), 86 percent have credit arrangements with the customers in operation (compared with 75 percent at the end of February). In 56 percent of the accounts agreements have been signed by the banks and the customers, and in 30 percent the banks have made a credit line available unilaterally.
Most of the improvement was due to the banks' unilaterally making credit lines available to private and large business customers: this applied to 33 percent of private accounts, and 19 percent of large business accounts. As a result of this process, only 13 percent of private accounts were operating at the end of March without a credit framework, and 31 percent of large business accounts. It is important to bear in mind that even in cases where the banks have made credit lines available to customers unilaterally, customers must sign the agreement by 1 January 2007.
Only slow progress was made among small business customers. At the end of March some 52,000 of these accounts, constituting 17 percent of all small business accounts, were operating without a credit framework, compared to 19 percent at the end of February. Hardly any small businesses (only 4 percent of these accounts) had credit made available to them unilaterally by the banks.
The share of accounts in which the credit limit was exceeded remained high, at 23 percent. In small business accounts the proportion exceeding the credit limit is extremely high, 40 percent, compared with 21 percent of private accounts. These figures include accounts defined as problem accounts (about 4 percent of all accounts requiring a credit framework), inactive accounts and others operating without a framework, regarding which the banks have to make efforts to close the outstanding debt or the account.
The Supervisor of Banks, Yoav Lehman, today called upon banks' customers, and in particular business customers, to come to credit agreements with their banks in the near future. "The combination of the lack of an agreed framework and the high share of accounts exceeding the credit limit is dangerous. Owners of these businesses are likely to experience difficulties and to suffer adverse consequences in two months' time. Banks' customers are urged to make use of the little time left to arrange their credit lines with the terms appropriate to them so that the credit balance in excess of the current limit will in future be included within the new limit or will be cancelled by an alternative financing plan."
In January 2006 Directive No. 325 of the Proper Conduct of Banking Business––which deals with the management of credit frameworks in current accounts––went into effect. The Directive requires the banks to sign an agreement with each of their customers on a credit framework appropriate to the customer's requirements, repayment ability, and collateral. The agreement, to be signed by the customer and the bank, will specify the obligation of the two parties to operate only within the agreed framework, and not to exceed the limit. At the end of December, in the light of the fact that there were many accounts still without credit arrangements, and that did not even have a unilaterally fixed credit framework, an extension of six months was granted, during which banks could still allow deviations from the framework. This extension runs out in two months' time, and the Bank of Israel states that no further extension will be granted.
The Supervisor of Banks considers it highly important that the banking system takes all steps to implement the directive, and will continue to monitor progress closely, so that on 1 July 2006, when the extension expires, there should be no more accounts exceeding their credit limit (except for those defined as problem accounts).
The table below presents the salient figures regarding the five major banks:

	Private customers	Business customers		Total number of accounts in the five major banks
		Small	Large
	31.3.2006			31.1.2006	28.2.2006	31.3.2006
Total no. of accounts ('000)	4,398	476	114	4,987	4,984	4,988
Total no. of accounts needing credit arrangement ('000)	2,834	313	83	3,312	3,229	3,229
Proportion of accounts for which agreement signed (%)	54	79	50	53	55	56
Proportion of accounts with unilaterally fixed credit linea (%)	33	4	19	20	21	30
Proportion of accounts for which customers were requested to make a credit agreement (%)	13	17	31	27	25	14
Share of accounts exceeding credit limit (%)	21	39	42	23	23	23

^a In these accounts the banks may set a credit line unilaterally, effective only to 1 January 2007, for customers who do not have a credit agreement.