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(photo credit: Bank of Israel)
The Bank of Israel announced a new directive that aims to "terminate the common practice in Israel of frequent and prolonged deviations from the approved credit framework."
In other words, the central bank is seeking to bring order to the ubiquitous overdraft, which has allowed generations of Israelis to divorce their spending from reality.
The new directive, issued by Supervisor of Banks Yoav Lehman, will force both banks and clients to conduct more transparent dealings, bringing an end to ambiguous norms on credit limits and the price of exceeding them, in an attempt to prevent overdraft accounts from spiraling out of control.
"The banks will have to determine the credit framework for the client that fits his needs, his ability to return payment and his securities, all based on documented analysis for the use of the bank's authorized credit personnel," the Bank of Israel statement said.
The directive allows the banks to group its clients and determine credit limits per group, in accordance with clearly defined criteria. Both banks and clients will be bound by the agreed credit limit.
The directive nonetheless allows for some flexibility. The bank will be allowed to grant unilateral extensions to the initial credit limit, provided that the client is informed of the change. However, no commission will be charged for the additional credit, and the interest rate on it will not exceed that fixed for the initial credit limit agreed between the bank and the client.
In the event that the client requests to make a payment that exceeds the overdraft limit and the bank is willing to allow it, an appropriate credit limit 'even if only temporary' must be agreed beforehand in writing.
The bank will only be allowed to charge higher interest rates and handling fees if it is unable to prevent an overdraft occurring in an account classified by the bank as problematic. In such a case, the bank is forbidden to include the additional interest and charges taken in its profit and losses report until they are actually collected.
The Bank of Israel stresses that its directive is not meant to dictate to the banks what the actual credit limits will be, what fees will be charged or the mechanism by which limits are matched to clients' needs.
In addition to clarifying credit norms for both the banks and their clients, the Bank of Israel believes that improved norms will help address the current distrust with which checks are viewed.
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