Small biz may get overdraft reprieve

By the end of May, credit limits had been set for 92% of accounts with overdraft provisions at the country's five largest banks compared with 87% at the end of April.

June 28, 2006 08:09
3 minute read.
checkbook 88

checkbook 88. (photo credit: )

With the deadline for bringing overdrafts into order just days away, Knesset members and small business representatives seemed Tuesday to come one step closer to having the new rules postponed. "I have no doubt that this regulation will bring about the closure of tens of thousands of small and medium businesses and the almost absolute collapse of the sector," said MK Ruhama Avraham (Kadima). The directive requires bank clients - whether private households or business account holders - to set defined credit limits from their banks. Banks may unilaterally set limits if clients fail to reach a mutual agreement. Checks written in excess of the credit limit after the July 1 deadline will not be honored by the banks, according to the current schedule. Economics Committee Chairman MK Moshe Kahlon (Likud) is expected to present a bill in the Knesset plenum today, which would require the Bank of Israel to retroactively seek Economics Committee approval for the overdraft regulation currently being implemented by the banks and the Bank of Israel in effect allowing the committee to stall application of the new rules. On Tuesday, Kahlon received an exemption from normal Knesset rules allowing him to skip a 45-day wait period and submit his legislation proposal Wednesday or Thursday. Sources close to the discussions suggested that a compromise may be reached, by which small businesses would be granted leniency, but that in any event private households still would be bound by the new rules, while others predicted that the Bank of Israel would collapse at the last minute and grant another extension of the deadline. Small business leaders and MKs Avraham and Kahlon are pushing for small businesses to receive some sort of exemption from the new rules, while the Bank of Israel, Finance Ministry, and Labor economist Avishai Braverman are fighting to keep the overdraft reform as effective as possible, sources indicated. Avraham had suggested freezing the rules' implementation for three months and establishing a joint commission, in which she and Kahlon would sit with the banks and regulators, but it was not clear Tuesday evening what would come of her proposal. She called on Banking Supervisor Yoav Lehman and Bank of Israel Governor Stanley Fischer to take into consideration the effects of the new overdraft rules on small businesses. Tuesday afternoon, Finance Minister Avraham Hirchson refuted reports that he had agreed to a three-month delay. The Bank of Israel, meanwhile, said Tuesday evening that, for now, preparations were continuing toward implementation of the regulation on July 1, as planned. Small business representative Yehuda Alhadef stressed that the stricter overdraft rules would have grave consequences for the nearly 400,000 small businesses he represents. "One-fifth could collapse without anyone noticing, because of the decision of one man," he said, referring to Lehman. According to existing business norms in Israel, suppliers are routinely led on by clients who repeatedly delay payments, necessitating the cushions of cash liquidity provided by the lenient overdraft norms in practice to date, Alhadef explained. "The State of Israel does not have the education [to adapt to] the American system. We need the higher limits of the [current] overdrafts, because everybody is deceiving everybody else ... This whole chain will collapse," hurting vulnerable small businesses first, said Alhadef, president of the Israel Craftsmen's Association and head of the The Federation of Israeli Economic Organization's small business committee. "This regulation will only make the banks richer, and we can't comply with it. What do they want? For us to work in cash? That's impossible," Alhadef said. Lehman had pledged that the new overdraft rules would be applied on July 1, stressing that he would not repeat the extension that was granted from the original January 1 deadline. By the end of May, credit limits had been set for 92% of accounts with overdraft provisions at the country's five largest banks compared with 87% at the end of April, but many clients were still exceeding the set limit, the central bank said earlier this month.

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