To reduce the scope of problems caused by payday loans a license requirement should be imposed for short-term lenders and effective supervision exercised over their activity, bank executives said at a roundtable hosted by the Estonian Banking Association and BNS on Tuesday.
They pointed out that while the legal amendments passed by the Riigikogu recently placed greater restrictions on advertising by express lenders and obliged them to make sure that the client is solvent, every company registered in the commercial register could issue such loans without any additional permit.
"There is no supervisory body that would exercise supervision over such beep lenders like the Financial Supervision Authority does over banks," Kairi Koha, chief of credit at Danske Bank, said.
Olavi Pakkonen, head of strategy at Nordea Pank, said that people often came into trouble with payday loans and this caused problems also in servicing their other obligations. "Unfortunately this ends in people being eventually evicted from their homes," he said. "It's disturbing for me as a citizen that the government has not regulated this domain significantly more."
Pakkonen said the problem could be solved either by improving people's financial literacy or changing the terms and conditions at which loans are issued.
"People who take such loans have a low level of financial literacy. What one does is effectively making use of their low financial literacy," Pakkonen said. "To my mind let there be beep lenders and let there be more of them, but as the first thing exactly the same requirements should apply to them as to commercial banks so that people would indeed understand what loan they are taking and what obligations it entails," he said.
Second, changes should be made to the conditions under which express lenders operate. "The government doesn't sufficiently stand for those people who cannot stand for themselves," he said.
Andres Tukk, director of the division for private finance at Swedbank, said the problem was that payday lenders did not abide by valid requirements. "The maximum annual percentage rate of charge has been imposed. The problem is that since there's no supervision, one doesn't abide by it and it applies to the client only when the client turns to court."
The court may decide that the rate of charge is unreasonably high and the provider of the credit will then give up a part of its income. "Since in Estonia the court system is too expensive for ordinary citizens and too complex looking from the viewpoint of the target group, in reality people don't come to the point [of litigating]," said Tukk.
He said the best thing to do to prevent problems is to impose a license requirement for payday lenders.
"Very many European countries have already regulated it," Tukk said. In Latvia payday lenders are required to have a license and other countries around Estonia are introducing regulation of this domain too, he added.
According to Swedbank there were 412 private limited companies providing loans to private individuals in Estonia last year. "You can make a private limited company using the ID card in 30 minutes, we are an e-country," Tukk said. "Within one hour you can make a company that has no regulatory requirements