Insolvency Bill may lead to rise in loan costs


THE COST of borrowing could rise significantly once the Personal Insolvency Bill becomes law as financial institutions price in the risk of more people being able to walk away from unsecured loans.

While the introduction of the legislation, which Minister for Justice Alan Shatter described as the “most radical reform of insolvency law since the foundation of the State” has been broadly welcomed, it could lead to interest rates on credit card borrowing and personal loans climbing, according to financial experts.

The Irish Banking Federation (IBF) warned that any costs associated with possible debt forgiveness programmes emerging out of the new legislation will ultimately end up being passed back to the taxpayer.

One of the new measures in the proposed Bill will see the introduction of debt relief certification allowing people who owe up to €20,000 in unsecured loans apply for a debt relief certificate if they meet certain criteria.

Once granted, their debt will be frozen for a year and then written off. Karl Deeter of Irish Mortgage Brokers said this is likely to see access to credit curtailed and the cost of borrowing increased as banks seek to protect themselves from future defaults.

“Unsecured credit is likely to increase because banks will have to factor in the relative ease with which some people will be able to walk away from their substantial debts,” Mr Deeter said.

“Once the risk of default increases, the cost of borrowing is also going to increase,” he added.

Sources within the banking industry agreed and claimed it was inevitable that the cost of borrowing would climb once the new legislation came into force.

Mr Deeter expressed confidence that new legislation would significantly improve the situation but warned that in the immediate aftermath of the Bill being implemented, there was “going to be a slaughterhouse” as a backlog of people with debts they cannot manage are processed.

He said that while banks will be able to veto voluntary arrangements many will embrace the changes because it will allow them to get bad loans off their books and return to normal business.

“At the moment our banks are struggling to get resolution in many cases and while they may not like every aspect of the new Bill at least it will allow them to get cash moving again.”

The banking sector has declined to comment in any depth about the legislation, and sources say that too many questions have yet to be answered before the sector will be able to draft a considered response.

Felix O’Regan of the IBF did, however, repeat the sector’s grave concern over secured debt being included in the Bill and he warned that the taxpayer could ultimately be asked to pay for widespread debt forgiveness. “It is taxpayers’ money that has helped to rescue the situation and the more costs that are brought to bear on the banks, then the longer it is going to take for the banks to return money to the taxpayer,” he said.