Excerpt from the forthcoming Annual Survey of Israel’s Banking System: Households’ participation in the loans market and their financial vulnerability- An analysis based on the Households Survey for 2016
· The Households Survey conducted by the Central Bureau of Statistics makes it possible to analyze the features of households that take loans, as alongside information on their debts, the survey includes, among other things, information on their income, size, and schooling. These data allow the examination of not just the population’s average but also its various segments, as well as a more-precise assessment of household leverage and the potential risks both to households themselves and to the financial system. Using survey data as a basis for analyzing household leverage has become the accepted methodology and has come into widespread use worldwide.
· The survey indicates that half of households (47 percent) have loans: 31 percent have consumer loans and 28 percent have housing loans. Of the 28 percent, 40 percent have consumer loans as well.
· The survey indicates that the share of low-income households (deciles 1–4) with a loan is higher than in the eurozone.
· Among households that took out loans, approximately 15 percent (about 7 percent of the total population) are considered financially vulnerable, meaning they have a high probability of encountering difficulty in repaying the loan.
· The analysis found that if these households reach failure, it will impact on the banking system’s potential credit losses to only a limited extent. However, their situation is liable to pose a risk to the households themselves, and therefore it is important to enhance financial awareness among the public with the goal of ensuring that consumers understand their financial situation and utilize credit only in accordance with their ability.
· It was found that borrowers who took a loan from a nonbank entity (insurance company, credit card company, financial leasing, private entity, union, free loan society) are characterized by markedly higher credit risk than borrowers who only took a loan from a bank, and it is likely that they turned to these sources because the banking system declined to extent credit to them.
· Nonbank sources of credit increase the supply of credit to the public, and enhance the competition for customers. Currently, however, lenders (including banks) lack information on the household’s total debt, which is liable to lead to high leverage among some of them and to an underestimation of the credit risk. To deal with this difficulty, and to enhance the competition in the retail credit market, the Bank of Israel is working to establish a central credit registry, and the Banking Supervision Department is working together with the Capital Market Authority to formulate a uniform regulatory standard for household credit.
 This does not include overdrafts at the bank (a “minus” balance in the account) due to lack of information. In 2016, overdrafts were about 10 percent of bank consumer credit. An analysis of the survey indicates that 27 percent of households had a “minus” balance the entire previous year. It was also found that 6 percent of households had a “minus” balance the entire previous year and did not take any loan at all (housing or consumer).