Bankers are endlessly resourceful in finding legal ways around any regulations that threaten to limit their profits. Today's Business section of The National sets out some details of the banks' new-found agility in the field of car loans.
Back in February the Central Bank announced a new rule as part of a package of changes in banking operations: effective May 1, car loans could no longer cover 100 per cent of a vehicle's price. The new limit was 80 per cent. (Access to consumer credit was tightened in other ways and bank fees were limited at the same time.)
The idea was to make sure that no new tide of bad consumer debt, in the event of another global downturn or for any other reason, could swamp borrowers and put financial institutions in peril.
But banks, apparently serene in their focus on short-term profits, have artfully found ways around the new rule, as we report today: many car buyers are finding it easy to get personal loans or to use credit-card debt to cover the "missing" 20 per cent of car-loan financing.
This works well for banks that can earn higher interest on unsecured loans, and certainly on credit cards, than on car loans. But in anything beyond the short term, this gimmick is too clever by half.
A car dealer's sales director called these tactics a "solution" for buyers, but in fact this particular type of access to credit is more likely to be part of the problem, for borrowers and lenders alike, in the event of any new economic storm.
With the total interest cost now higher, the new 80-plus-20 financing leaves clients more vulnerable, not less, to any income setback, be it prompted by personal or worldwide events. In the event of economy-wide trouble, this naturally leaves the banks, in turn, more vulnerable.
In an ideal world people could borrow and banks could lend all they wanted - but each would bear appropriate risks as well as the benefits of the transaction. In a world of credit crunches, deep economic instability and moral hazard, however, wide-open lending has already been exposed as the fast lane to trouble. In the last two years banks have been working hard to clear bad loans from their books. They should have learnt the lesson of prudent lending by now.