(photo credit: )
The good old spendthrift days, in which being deep in the red was the rule rather than the exception for most of this country's households and businesses, are coming to an end this morning.
From this day onwards it'll still be possible to stay overdrawn on one's account, but only within more defined and stringent credit frameworks, a departure from which could entail heavy financial penalties to the extent that Israelis' rampant disregard for the bottom line would become far less attractive an alternative to balancing one's check book.
JPost.com's Q&A on overdraft refrom to be published on Wednesday, July 5
Under the new rules, overdrawing within the limits of the clients' arrangements with their bank will incur lower interest rates than the exorbitant ones charged hitherto, and will reward the ability to plan rationally rather than write checks for which there's no cover. The uncertainty and the dependence on a given banker's arbitrary whims will be obviated.
The new rules coming into effect today don't just add credit strictures but essentially change the structure whereby credit is made available. Adherence to credit limits will be rewarded, while throwing all bookkeeping caution to the wind will become far less enticing.
The change - though already postponed from the initially scheduled January 1 this year - had triggered outcries of anguish from households (generally those on the lower rungs of the economic ladder) and from small businesses (generally those already teetering on the brink of insolvency). This was quickly translated into populist politics and an attempt in the Knesset to put the new regulations off, omitting mention of the fact that they had already been delayed. The value the further six-months' deferment which MK Moshe Kahlon (Likud) sought to impose by legislation and the three months MK Ruhama Avraham (Kadima) attempted to win by personal lobbying is highly questionable.
The present accounting anarchy that too many families and businesses had grown fond of has to go even if it'll be missed. Credit without clear and unambiguous guidelines is like playing a game without rules. One never knows what to expect. And when this system becomes comfortable, it takes on the characteristics of an addiction to a narcotic which induces a sense of deceptive bliss.
Lack of financial discipline isn't only harmful to those who appear to exploit its ostensible short-term benefits, but it can also erode bank stability. In the long run, when too many in an economy live beyond their means for too long, something is bound to give way.
Moreover, those who succumbed to the lure of easy money ended up paying outlandish bank fees and inflated interest rates. The banks raked in profits and had no incentive to bring capricious chaos to an end. They never bothered to put the brakes on except in rare cases of excessively poor risks and a surfeit of bouncing checks. Banks love overdrafts which is why their voice was near absent from public discourse on the issue.
The Treasury for its part was remiss in not launching a comprehensive campaign to explain to the public the nature of the new frameworks. Too many people fail to realize that their credit lifeline isn't about to be severed. They can determine its extent and keep things where they had essentially been. As long as they stay within set bounds, they'll pay less interest. The banks have no inducement to deny the credit on which their profits hinge.
Indeed banks may now face competition from life insurance and credit card companies, whose own credit programs - unaffected by the new regulations - may become more competitive.
An information campaign could likewise have spared small entrepreneurs superfluous angst. The Trade and Industry Ministry's prediction that 4000 business will go belly up and lay off 35,000 employees is alarmist and colored by the same populist politics as Kahlon's and Avraham's initiatives. It's distinctly in the banks' interest to help out salvageable businesses.
Failing enterprises, however, cannot be kept afloat even via shoddy credit management. This overdue overhaul may hurt but is nonetheless essential.