Bank overdraft reform takes effect

Small businesses threatened; could mean loss of 35,000 jobs

overdraft image 88 (photo credit: )
overdraft image 88
(photo credit: )
As the new overdraft directive came into effect on July 1, the Ministry of Industry, Trade and Labor warned that 4,000 small businesses were expected to face closure. The overdraft reform of bank accounts was enacted after the Supervisor of Banks Yoav Lehman had not backed down on the prompt enforcement of the new overdraft directive despite several postponement demands from the Knesset Finance Committee.'s Q&A on overdraft refrom to be published on Wednesday, July 5 Finance Committee chairman Yaakov Litzman had appealed to the Bank of Israel to delay the timing of the enforcement of the new credit rules since 80 percent of banking customers had not yet formed credit frameworks at their banks and were not yet prepared for the change. Last week, MKs at two Knesset Finance Committee meetings requested either postponement or, at least, gradual implementation of the reform. "The banks might try to 'hitch a ride' on the new credit regulations to restrict credit to the disadvantage of the customer," said Litzman. "Banks will be poised to claim that the Bank of Israel had taken away their discretion and, therefore, the Bank of Israel should reconsider its position on the matter, in view of developments on the ground." Under the new directive, banks had to set a fixed credit facility that clients will only be able to exceed under very special conditions. According to the Bank of Israel, banks have had to set a credit frame for each client that suits his or her needs and ability to repay. "The directive does not determine the credit framework offered by the bank to its customers. The directive will ensure that customers will stay within their credit limits", said Lehman. In light of the concerns, the Bank of Israel said measures would be taken to ease the transition to manage credit frameworks without excessive overdrafts. Within the "adjustment period" the banks will be given tools to help their customers, such as providing one-time credit frameworks or other kinds of loans. About 70 percent of those are businesses that did not personally arrange their credit frameworks as requested by the directive because of the financial difficulties they were undergoing. The closure of the small businesses would leave 35,000 people unemployed. "Many small businesses don't know or find it hard to deal with banks so when the banks arrange their credit frameworks, they believe everything is in order and they don't need to personally go into their bank branch," Nir Kantor, director of the Small and Medium Businesses Committee at the Manufacturers Association of Israel told The Jerusalem Post. Then ministry said that although part of the businesses in question were already at risk of facing closures because of economic difficulties, their chances of rehabilitation have been eroded by the implementation of the directive. "I have no doubt that the overdraft directive will threaten the survival of small businesses," Kantor said. "It will have a domino effect, it will be enough for one business to have credit difficulties, which in turn will have an effect on their suppliers and so on." The assessment on the repercussions of the directive was based on a survey of 250 small businesses employing a maximum of 50 people. The survey was conducted by the Economics and Research Department of the Ministry of Industry, Trade and Labor three weeks ago. According to the survey 23% of small businesses had not yet arranged their credit frameworks, mostly those in the hospitality and food business. About 30% of small businesses, which arranged their credit framework widened their previous framework, while 9% narrowed their framework but the majority, 61%, did not change the height of their credit framework. Furthermore, the survey revealed that about 24% of the small businesses that have arranged new frameworks are not staying within the boundaries of those arrangements.