Ban on dollar mortgages in Armenia: On guard of consumer interests  or lobbying for banking interests-  Karen Zakaryan

ArmInfo. Currency volatility causes significant risks not only for the state, but also for those citizens who have foreign currency and especially mortgage loans.  Armenian MPs of the ruling party noted the risks and suggested  issuing mortgages in drams, except in cases where citizens have  proven income in foreign currency.

Karen Zakaryan, C.E.O. of the Financial Market Members Association (FINARM), told ArmInfo whether the initiative is justified and whether it will lead to a rise in  price of credits.

There are and will be risks of foreign currency lending, the expert  notes. They will be as long as citizens will take on obviously  unsustainable obligations in foreign currency, succumbing to the  momentary temptation of low interest rates, revaluation of the dram  against the dollar and receiving income in drams.  <Perhaps, someone  may see in the initiative a restriction of consumer rights, but, as  experience shows, as long as the level of financial literacy of  citizens, as well as the management of financial risks,  are at a low  level, it is the state that has to save citizens who have fallen into  the dollar trap within the framework of its tools >, - the expert  assures.

Karen Zakaryan reminded in this vein about the representatives of the  ICT sector, who for many years, being in a fairly comfortable zone  for themselves, namely, receiving income in foreign currency, could  not even think that at some point they would be forced to cry for  help from the state. But the paradise for the recipients of dollar  revenues ended and the state was forced to "throw a lifeline" to  them, allocating 10 billion drams. In the meantime, they, like many  others, simply needed to take into account the costs of hedging  foreign exchange risks in their expense column, Zakarian points out.

Why today?

The moment for introducing legislative changes is the best, the head  of the Financial Market Members Association believes. Since March  2022, the Armenian dram began its victorious march and during the  year the national currency appreciated against the USD by 15-20% and  so far maintains its positions. "Lucky for those who took loans in  dollars until 2022, citizens may think that they will start massively  taking mortgage loans in dollars (consumer loans in dollars were  banned several years ago). And what if the revaluation of the dram,  which is exogenous, takes the opposite course, or even the dollar  rises to AMD 500-600 . As a result, thousands of citizens may lose  their homes>, Zakarian says.

In this regard, according to the head of FINARM, today, when the  dollarization of mortgage loans is at a low level, it will be easier  to break the tendency to take financial obligations in dollars for  the population.

Will the cost of credit go up?

During the discussions in the National Assembly, the MPs expressed  concern that since banks and credit organizations raise funds in  foreign currency, but at the same time they will be forced to issue  funds in drams, this will lead to the fact that volatility risks will  be included in the interest rate. During his speech in the  parliament, the Deputy Governor at Central Bank of Armenia himself  did not completely exclude such risks, only noting that financial  institutions, unlike citizens, have tools to manage risks. "We hope  that in the near future we will not see a significant increase in  interest rates, all things considered," Deputy Governor at Central  Bank of Armenia Hovhannes Khachatryan said.

<It is not so important for the bank in which currency to allocate  the funds. It is more important for it to minimize risks and ensure a  return on its investments. And regardless of the currency in which  they finance, banks have the opportunity to turn them into AMD  liquidity and provide AMD loans. However, in case of large gaps in  funding and placement currencies, the Central Bank may need to be  involved, but this is another topic>, he says.

As Zakaryan emphasizes, in addition, the share of mortgages in the  loan portfolio is not large (18.7% in 2022, compared to 16% in 2021),  and even less if non-AMD mortgage loans are taken into account. On  the other hand, there are no restrictions and are not provided for  business loans (loans to legal entities decreased to 51.1% in 2022  instead of 58% in 2021, ed. note). "It is assumed that in parallel  with the growth of the economy and external trade, the volume of  business loans and the issuance of corporate bonds will grow, which  means new opportunities for banks to issue loans or invest in debt  securities in foreign currency," the expert notes, pointing out that  interest on loans today are no longer small, considering that the  Central Bank refinancing rate has reached its historical maximum  level of 10.75%.

At the same time, Zakaryan urges to take into account one remarkable  detail in the forecasts of the growth of interest on mortgage loans.  Since at this stage the income tax refund program for the mortgage  tax is still in effect (the gradual abolition of the system will end  on January 1, 2025,  ed. note), and < mortgage holders > are not very  picky about the proposed interest rates on the principle "we lose the  income tax anyway, so let that cover the interest payments". <11% or  13% is not so significant for the borrower if today his income tax  covers these payments. That is, today there is a huge factor  influencing the growth of interest on the loan>,  he notes.  Meanwhile, the borrower does not take into account that in 5-10 years  the ratio of repayments changes - the amount of payments on the  principal amount increases, while, as you know, the repayment program  does not apply to it. Then the entire burden of payments falls on the  shoulders of the mortgage holders.

Thus, the head of FINARM does not see a direct connection between the  ban on dollar mortgages and a possible increase in interest on AMD  loans.