HUB: Banks Have Sent Clients Offers to Switch to Authorized Overdraft

Banks have sent individualized offers to all clients with approved implicit overdrafts on their transaction accounts by June 30, as reported by HUB, while the central bank suggested to consumers that it is in their interest to enter into a contract for switching to authorized overdraft.

Recall that on July 22 last year, representatives of the Government, the Croatian National Bank (HNB), and 13 banks that were then offering implicitly accepted overdrafts signed Memorandum of Understanding regarding overdrafts on current accounts, emphasizing that the goal is to return authorized overdrafts as the dominant product in the market.

Namely, surveys conducted by the HNB in 2020 showed that implicitly accepted overdrafts had become dominant in the Croatian market, and since this is a product that is more expensive and provides consumers with less protection, activities were initiated in July 2021 to restore authorized overdrafts as the primary form of overdraft, which will ensure a higher level of protection for consumers, stated the HNB in response to Hina’s inquiry.

By the end of last year, the HNB reported that about 1.8 million consumers had approved overdrafts, of which the majority were implicitly accepted overdrafts, more than 95 percent of the total approved. The total utilized amount of overdrafts was 5.3 billion kuna or 703 million euros.

The purpose of the signed memorandum was therefore to enable consumers to switch from implicitly accepted to authorized overdrafts, and as the Croatian Banking Association (HUB) responded to Hina, banks have sent individualized offers to all clients with approved implicit overdrafts on their transaction accounts.

Deadline of Nine Months to One Year for Considering and Contracting the Switch

Namely, the obligation of banks was to send offers to consumers by June 30, but consumers, depending on the bank’s business policy, have a deadline of nine months to one year to consider those offers and contract the switch to authorized overdraft on their transaction accounts.

– Banks will offer clients the use of authorized overdraft under the same conditions they had when using implicitly accepted overdraft, and depending on technical possibilities, contracting authorized overdraft will be possible by visiting a branch or through digital channels – they stated.

When it comes to banks’ offers for switching from implicit to authorized overdrafts, the HNB explained that a bank can offer a consumer to replace the entire amount of implicit overdraft with authorized or in combination of authorized overdraft with implicit.

If a bank offers a combination of authorized and implicit overdraft, then the authorized overdraft must be at least half of the existing implicit overdraft, and the share of the new implicit overdraft can be at most equal to the monthly income, it was stated.

Most Banks Cease Approving Implicitly Accepted Overdrafts

After the deadline for concluding contracts for switching from implicit to authorized overdraft, the central bank states, if a consumer has not accepted the bank’s offer and concluded a contract for authorized overdraft, and continues to use implicitly accepted overdraft, the bank can reduce or cancel that overdraft, in accordance with its own business policy.

The HNB also emphasized that after the expiration of the bank’s offer, the limitation of the effective interest rate (EIR) that was prescribed by the memorandum no longer applies to implicitly accepted overdrafts.

Thus, if a bank leaves the consumer the option to use implicitly accepted overdraft, it is expected that such overdraft will be more expensive compared to authorized.

– It follows from the above that authorized overdraft is more favorable for consumers compared to implicitly accepted, and if they wish to use overdraft on their current account, it is in their interest to conclude a contract for authorized overdraft – suggested the central bank.

However, HUB reported that most banks have decided that they will only offer authorized overdrafts, meaning they will cease approving implicitly accepted overdrafts for all new clients.

In such cases, if a client decides by July 1, 2024, to repay the amount of implicitly accepted overdraft or does not contract authorized overdraft on their transaction account, the bank will notify the user 30 days before the cancellation of the overdraft about the possibility of repaying the canceled amount in at least 12 monthly installments at an interest rate that is not higher than that applied to authorized overdrafts, or the interest rate that applied to implicitly accepted overdraft, if that interest rate is lower, HUB explained.

All Banks Limited EIR on Implicit Overdrafts by September 1, 2022

According to the memorandum, banks were required to apply the EIR limitation on implicitly accepted overdrafts by September 1, 2022, and the HNB determined that all banks complied with this obligation, which consequently led to a reduction in the cost of overdrafts, i.e., a significant reduction in interest rates.

According to data collected at that time, the lowest nominal interest rate (NIR) on implicitly accepted overdrafts was 3.75 percent, and the highest was seven percent, while the lowest EIR was 3.81 percent, and the highest was 7.31 percent, which was also the maximum allowed level.

The current limitations of NIR and EIR that apply to authorized and implicitly accepted overdrafts, for the period from the beginning of January to the end of June this year, are 8.25 percent for NIR and 7.5 percent for EIR, stated the HNB.

According to calculations by the central bank, citizens who used implicitly accepted overdrafts up to 10,000 kuna before the application of the limitations and if they used those overdrafts throughout the year, paid an average of about 240 kuna more annually in higher interest.