Warnings of debt trap as banks lend interest-free after cyclone
Millions of dollars of emergency interestfree overdrafts have been made by banks to flood and cyclone victims after the Government eased responsible lending regulations in February.
As well as the interest-free overdrafts, banks have been allowing some people with home loans to make emergency extensions of up to $10,000 on that borrowing.
The country’s largest bank, ANZ, said it had so far granted $4.75 million in emergency overdraft extensions to households and businesses.
But there are now calls for banks to extend the length of time those loans remain interestfree so cyclone and flood victims don’t end up in a vicious debt cycle.
Natalie Vincent, chief executive of no-interest lender Nga¯ Ta¯ ngata Finance, said: ‘‘So many things that are done with the best intentions very quickly turn into problems.’’
The interest-free emergency loans from the banks were for periods of as little as 45 to 90 days.
Banks should be working
with borrowers closely to ensure those debts were repaid promptly, and did not become a high-interest drag on families, she said.
ANZ charges 18.9% on consumer overdrafts. Westpac charges 19.95%.
The emergency no-interest loans were made after the Government temporarily relaxed responsible lending regulations, so banks could make loans to people who desperately needed money.
But those responsible lending regulations existed to protect people, and Vincent said there was potential for harm.
Revolving credit facilities such as overdrafts and credit card debt at banks were one of the most persistent forms of debt, she said.
‘‘We’ve been working closely with our customers who have been impacted by the North Island floods and Cyclone Gabrielle to understand how best to support them,’’ an ANZ spokesperson said.
Westpac said it had so far provided about 340 interest-free temporary overdrafts with an average value of about $1300, making for a total of around $442,000.
‘‘We’ve also given more than $2.5m in non-repayable grants to business and agribusiness customers affected by the cyclone and flooding, and continue to process further applications,’’ a Westpac spokesperson said.
A Bank of New Zealand spokesperson said: ‘‘At this point in time the numbers are low as we’re seeing customers choosing alternative support options, such as restructuring their mortgage, switching to interest only or accessing their KiwiSaver funds rather than taking on more debt.’’
Westpac and TSB were the first of the banks to make emergency interest-free loans available to cyclone and flood victims, which prompted Commerce and Consumer Affairs Minister Duncan Webb to call on other banks also to offer their emergency loans interest-free.
Within a week all the major banks agreed to make their emergency loans interest free, but even then financial mentors were warning the loans could turn into long-term, interestbearing debt.
As well as extending shortterm interest-free overdrafts, banks like ANZ have been helping people make emergency
hardship withdrawals from KiwiSaver.
KiwiSaver statistics for hardship withdrawals during February have not yet been published by the Inland Revenue Te Tari Taake.
‘‘We’re waiving approximately $1.16m of fees for our business and personal customers,’’ ANZ’s spokesperson said.
Banks have also been making donations to cyclone relief charities, but they have been criticised as their contributions represent only a tiny proportion of their annual profits.