Croatia: Banks Slapped For Bad Behaviour – To Fork Out Billions For Overcharging

Judge Radovan Dobronic Photo: Pixsell

It’s said that it’s a first of its kind in the history of Europe! It’s certainly the first such case in the history of Croatian court litigation. And – I am so glad it happened in Croatia – the country where democracy and citizens’ rights are still being painstakingly asserted.

Some months ago Croatian association “Franc”, together with “Consumer” society filed a collective lawsuit against nine banks in Croatia – claiming unfairness in the bank loan contracts’ currency clause and one-sided variable interest rate clause.

Judge Radovan Dobronic of Commercial court in Zagreb ruled last Thursday, 4 July, that nine banks situated in Croatia (mostly foreign owned:  Zagrebacka bank, Privredna bank, Erste bank, Raiffeisenbank, Hypo Alpe-Adria-Bank, OTP, Splitska, Volksbank and Sberbanke) are to compensate the borrowers who took out bank loans in Swiss Francs for the banks’ overcharging. Some 100,000 Croatians took out the loans in Swiss Francs between 2005 and 2008 as they attracted lower interest rates at the time. However, when the global financial crisis hit in 2008, the exchange rate between Swiss Franc and Croatian Kuna spun out the scenario where – compared to the loan value in Kunas – the bank debtors were now owing much more than they borrowed and their repayment rates increased manifold.

Judge Dobronic ruled that the banks, as professional bodies, were wrong to offer their clients loan services tied to the Swiss Franc, with variable interest rates and variable loan principal. Such combination, ruled judge Dobronic, with unlimited variable interest rates and loan principal at times of exchange rates fluctuations and over a long period of time is completely unacceptable. He further stipulated that the banks in question had breached consumer rights because they did not fully inform them about all parameters necessary for making decisions.

So this court case in effect ruled about the proper bank behaviour in and around loan contracts, but individuals holding such loans will need to mount private and individual lawsuits against their banks in order to attempt receiving any compensation due to them from the banks.

It’s estimated that if all 100,000 people who took out the loans in Swiss Franc are successful in their court bids, the banks would jointly need to fork out some 15 billion Kunas in compensation (some 15% of the country’s current annual budget revenue!).

The plaintiffs in the above court case sought determination by the court that the banks entered into loan contracts dishonestly, when it came to currency clause in Swiss Francs with variable interest rates and claimed that the amounts payable on interest rates that changed over time should have been guided by the exchange rate of the Swiss Franc that was valid at the time when loan contracts were signed.

Croatian finance minister Slavko Linic is “keeping mum” about the whole affair, barely commenting that it’s the banks’ problem and that they will need to solve it.

Judge Dobronic’s ruling is yet to pass through an appeal process and if the banks appeal, and their  appeal is overturned, then one may speculate as to whether such a large compensation payout will, in fact destabilise the banking sector in Croatia. It is certainly a large amount of funds that would gush out from the banks’ reserves/profits etc.  And, what of many loans that were taken out in Euros, in Croatia, do they also hide similar contractual flaws!?

People who took those loans should be compensated for their losses if the facts are as stated by Judge  Dobronic’s findings. I agree with that. But I find it incredulous that the banks could have been so stupid by assuming that “no one will notice” when the exchange rates change and loan repayment rates soar to borrowers’ financial suicide levels as a consequence.

It almost smells like a foreign owned banking conspiracy to destabilise Croatia.

Be it as it may, but it certainly looks as though consumer education and protection still needs a great deal of work in Croatia. This whole case also appears to me as if the banks issuing those loans in Swiss Franks attracted a clientele so needy that they didn’t even have enough courage to question the terms of the loans at the time even though much of the public may indeed have been savvy about the meaning and implication of changing currency exchange values. The whole scenario reminds me of bank loans issued in U.S.A. where repayments built to levels far above a person’s repayment capability and, in the end, bank foreclosures on homes spread like wildfire. The issue with Swiss Franc loans in Croatia is, I believe, much more serious than the media lets out and sadly, if those loan contracts are not fixed quick smart, many will find themselves without a home. So, while the finance minister may not want to say much about the problem, the justice minister must; he must push for speedy resolutions and ensure that the banks in question, because of such court ruling, don’t create a banking sector crisis and a housing crisis where foreign investment would be the only “salvation”. This would not be salvation – it would be slavery. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)