Finombudsman: Amendments to the Civil Code on the imposition of fines and penalties will reduce the number of outstanding loans and non-creditworthy consumers

ArmInfo. At the end of 2017  at the meeting of the Armenian parliament in the first reading  amendments were made to the RA Civil Code concerning restriction of  the rights of commercial banks and credit organizations of Armenia in  the accrual of fines and penalties. To learn more about the specifics  and consequences that these changes can bring with them, ArmInfo  talks to the Financial Ombudsman of Armenia, Mrs. Piruz Sargsyan.

The Parliament recently approved a draft amendment to the RA Civil  Code concerning the restriction of commercial banks and credit  companies in the rights to impose fines and penalties. In this  regard, it would be interesting to know how many complaints are  received by the FinOmbudsman office from borrowers (banks and credit  companies) regarding the excesses of assessed fines and overdue  notification of delinquency?

First of all, I would like to note that these amendments were adopted  on December 14, 2017. Entered into force on January 8 this year and  apply to credit agreements that were concluded, respectively, after  the amendments entered into force. According to Article 372 of the RA  Civil Code, the established maximum penalty rate for fines can not  exceed 4 times the maximum rate set by the regulator for banks. At  the same time, the accrued penalties and pennies for the customer's  debts cannot exceed the double size of the principal amount of the  loan, irrespective of the time of the delay.

As for complaints from borrowers regarding the amount of assessed  fines, if we consider the overall statistics of our applications,  then this figure is not large. Nevertheless, there are cases that  cause fear, and in connection with this, the adoption of these  amendments in RA legislation was necessary. Changes, I regard, only  from a positive point of view.

Then how relevant was the adoption of the law?

The urgency of this law is primarily that if earlier, according to  the 372nd article of the RA Civil Code, the amount of accrued  penalties and pennies could be reduced only by a court decision, and  basically in cases when the party itself filed an appropriate claim.  With the entry into force of the Act in certain cases, if the amount  of fines obviously does not correspond to the consequences of  violations other than the court, the Financial System Mediator also  receives the authority to reduce the amount of penalties and pennies.  At the moment, very often the total amount of loans with accrued  fines and pennies is several times higher than the income of  consumers, and then the exit from the debt hole becomes almost  impossible. As a consequence, this situation negatively affects both  the consumer and the lender, and the financial market as a whole. I  believe that these problems will be resolved through new amendments,  and the burden of consumers will be facilitated, which, of course,  will positively affect the financial market.  In particular, if we  consider international trends in the development of the financial  sector, we will see that in many countries the issue of lending to  natural persons is settled in this way. In particular, in the region.   In Russia and Kazakhstan, these changes were made quite a long time  ago. In addition, recently we held a forum, to which the  representatives of the financial structures from countries where the  sphere was sufficiently settled were invited. We had guests from  South Africa, Australia, who shared their experience in the matter of  consumer protection, in particular in terms of reducing the credit  burden. Based on the experience of colleagues, I can say that the  problems relating to the accrual of fines and penalties will be  settled thanks to this bill.

And how can these changes affect the performance of financial  institutions?

We do not have such statistical data on financial organizations and  their indicators, therefore, we can not make any conclusions and  forecasts. Perhaps in the beginning there will be some difficulties,  but I believe that the financial organizations are quickly adapting  to the changes that, as a result, will benefit them and the financial  market as a whole. As the number of outstanding loans and  non-creditworthy consumers will decrease.

Is there a risk that due to the entry into force of the Law, the  share of overdue loans in the banks of Armenia will increase? Does  this Law carry such risks?

I believe that these amendments do not carry risks in themselves,  since on the one hand the creditor has the right to demand from the  borrower an amount equal to the double amount of the principal amount  of debt for the current moment, and on the other hand, consumers can  make more rational decisions, in particular, correctly calculate your  income and assess the possible maximum losses before you go to  lending.

The amendments to the Civil Code will oblige the lender to notify the  borrower on time, because otherwise no fines and penalties can be  applied against the borrower. Moreover, banks and credit companies  often wait for several months, and even a year before declaring a  debt. To prevent this from happening, a maximum period of 3 months is  set, after which banks will not have the right to charge fines and  penalties.