Supervisor of Banks Yoav Lehman
on Wednesday gave in to pressure and granted a six-month transition period on enforcement of new credit regulations, averting the confusion that was likely to have set in had they been implemented as scheduled on January 1.
In a draft circular, Lehman blamed the country's banks for not being ready for the overdraft reform.
"Over the past few months the Banking Supervision Department has received many reactions and comments from banking corporations and their customers that they are not yet in a position to implement the directive and that if it goes into effect on the planned date, many problems are likely to arise," the draft circular said.
Further, the Bank of Israel was concerned about the detrimental effect the directive might have on small and medium-sized businesses that have not yet made the proper arrangements.
The banks welcomed the decision but refuted the Bank of Israel's comments.
"The banks have said all along they were prepared for implementing the directive as planned and did not ask for a delay of the directive and thus they will not take any responsibility," said the banking union.
The banks and the Bank of Israel will discuss the draft on Thursday.
During the next six months, banking customers will have another window of opportunity to get used to living within their financial means and to review with their banks how to better manage their personal and business finances.
"The overdraft reform involves a major cultural change within the public. The change, however, will not be affected by a time frame. More active steps by banks, the Bank of Israel and the public sector need to take place to alert awareness and action by households and businesses," said Shalom Sagiv, CEO of Obelisk, which provides credit solutions for the business community.
Despite what had been an imminent deadline, the public has either been unworried or unaware of the implications of the changes as it was revealed at the beginning of this month that 80% of bank customers had not yet arranged their credit frameworks.
Under the new directives, banks would have to set a fixed credit facility which clients may exceed only under very special conditions. Banks must set a credit frame for each client that suits his needs and ability to repay. In effect, it means that if a banking customer is over his credit limit and writes a check it would bounce and the customer would have to pay a fine. He also would not be allowed to make ATM withdrawals.
During the transition period, businesses and households would be required to stay within their credit limits but it would be at the discretion of the banks to allow credit limit breaches.
Lehman cautioned, however, that during this time the banks should be extra careful not to automatically bounce checks over technicalities.
In an effort to ease credit distress especially for small businesses, the banks may grant or renew credit frameworks during the interim period until July 1, 2006, for business borrowers who have not completed their financial reports.
"There was a lot of worry that in the short-term, especially, small and medium-sized companies will have to pay a high price. But the transition period is a chance for businesses and private individuals who have now been alerted by the press to approach their banks," said Sharon Feder, head of the business department of Bank Otsar Hahayal. "I am confident that we will see a gradual change from January in the public's credit behavior."