Romanian banks argue consumer protection agency’s request defies math

Alpha Bank first and then BCR Bank argued that the requirement expressed by the consumer protection body ANPC for re-making the instalment calendar for their customers, such as having both equal instalments and equally-distributed principal repayment, is not possible, Ziarul Financiar reported.

Math doesn’t allow this, they argued. As the outstanding debt is decreasing, so is the monthly interest on the stock of outstanding debt – a fact that nobody can argue.

However, there is a way to address ANPC’s request by backloading the interest. This is possible mathematically by deferring the payment of accrued interest. In principle, this can be done. But if properly done, the outcome is precisely the repayment calendar calculated by banks as of now – with only a different interpretation.

By “properly done”, we mean the charging of interest on accrued interest. The “charging of interest on accrued interest” was the subject of heated debates during the loan repayment moratorium during the Covid-19 crisis and was eventually not accepted even if economically it is totally legitimate.

If such “interest on accrued interest” is not acceptable, then the banks will have to cover this cost out of their pockets, and the interest rates would naturally increase such as to result in the same overall profitability. It is possible (but not likely) that this is what ANPC had in mind when making the recommendation to banks: urging them to backload the interest at their own cost.

If the principle (of interest on accrued interest) is accepted, then the repayment schedules will be exactly as they are now: only that the segments of the monthly payments will be differently denominated.

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