Facts and Analysis. Small Loans Market and Regulation in Lithuania

The small loans market (quick credit, pay day loans) often gets a lot of criticism in the media. Its critic’s state that the market has too little supervision; that the industry does not properly access the ability of its customers to repay their loan; high interest rates etc. In October 2013, the Lithuanian Bank introduced a new amendment to consumer credit law underthe Ministry of Finance. Some of the amendmentsare very strict and their implementation will have a significant negative impact on the consumer credit market. However, the impact is felt not only buy credit grantors, but by their beneficiaries as well, as access to consumer credit becomes more difficult.

Before the introduction new regulations, it is necessary to pre-assess existing needs. There must be a clearly identified problem (without any distortion) and it must be solved in a way that does not essentially result in the collapse of market services (regulation may not be the actual service insurance). Adjustments must also be based on the proper use of problem assessment in the credit market.The techniques currently used, and the indicators evaluating the extent of the problems in the consumer credit market, are not compatible, and they distort the true state of the industry.  The regulator, in order to better assess the situation, should improve valuation methods and collected statistics in the industry.

Many of the problems in the consumer credit market stem from the adopted solutions of irresponsible credit borrowers. Therefore, regulations have to ensure that incentives for responsible decision making are not impaired,such as the transfer of responsibility fromthe credit buyer to the creditor. Regulation has to be directed to people with personal responsibility. Troubleshooting has to be focused on thecustomer’sfinancial knowledge and understanding of the risks involved. However, regulation cannot presume that all market participants are incapable of making the right decisions, and a consumer credit service in the market (in one form or another) is desirable.

Before imposing further regulations, it is necessary to assess whether the existing regulations are not sufficient. Lithuania has adopted many common laws in the governing the consumer credit market. Statistics show that these regulations have an impact on the market. Therefore, it is necessary to make sure the existing regulatory framework already addresses the problems.

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