The Croatian National Bank (HNB) has sent a circular to banks informing them that it is launching an initiative to amend and supplement the Consumer Credit Act regarding the approval of overdrafts on current accounts. HNB has informed banks that it expects them to promptly begin appropriate activities to align their practices with the announced regulatory changes.
The Croatian National Bank conducted a study of banking practices and found that 70 percent of consumers with open current accounts receiving regular income have an approved overdraft. In this context, banks offer permitted and tacit overdrafts, with more than 95 percent of all overdrafts being tacit overdrafts, which are on average 30 percent more expensive than permitted overdrafts and often amount to up to 300 percent of average monthly income.
A permitted overdraft is the amount of funds that the bank makes available to the consumer based on a written current account agreement, while a tacitly accepted overdraft is one where the bank makes funds available to the consumer that exceed the current balance of the consumer’s current account or the agreed overdraft.
Permitted overdrafts are credit agreements, for which full consumer protection is provided, including a limit on the effective interest rate (EIR), gradual repayment in 12 installments, comprehensive information to consumers about the product, as well as prior assessment of creditworthiness. In contrast, in the case of tacit overdrafts, the business relationship is regulated by the current account agreement, so the provisions of the Payment Transactions Act apply to consumer reporting, and the bank is only obliged to provide information about the interest rate and fees. Additionally, for tacit overdrafts, creditworthiness assessment is not mandatory, the EIR limit does not apply, and the provision for debt repayment in 12 installments in the event of a reduction or cancellation of the overdraft is not mandatory.
Research Results: Two Products Merged into One, Consumer Protection Inadequate
Permitted overdrafts were the market standard until 2018, and the beginning of broader approval of tacit overdrafts followed the adoption of the Decision on the Effective Interest Rate at the end of 2017. The research results showed that in the current market offering, two products have merged into one, but under conditions that do not provide adequate consumer protection, and at a significantly higher price.
Since 2019, there has also been an increase in monthly fees for maintaining current accounts, which is directly related to the fact that the limit on the effective interest rate from Article 21.a of the Consumer Credit Act (hereinafter: CCA) does not apply to tacit overdrafts.
By transitioning to tacit overdrafts, banks have retained essentially the same functionalities of the product that permitted overdrafts had (e.g., available amounts, differentiated by target groups), as well as the data processing conducted when approving or renewing overdrafts (e.g., selection criteria and approval rules). As a result, consumers pay a significantly higher price for the same service because these two products are equalized in their functionalities. Furthermore, it is certain that some consumers who have been granted tacit overdrafts without their request are not even aware of the credit relationship they enter into by using that overdraft.
