Title: MP Kostis Efstathiou Proposes Legislation to End Compounding Interest on Delayed Loans
In a move that could significantly alter the way banks handle delayed loans, Member of Parliament Kostis Efstathiou has introduced a bill aimed at ending the practice of interest compounding, which can lead to borrower vulnerability due to increasing debt loads. The submitted proposal seeks to amend the current Law on Interest Rate Liberalization to prohibit banks from capitalizing compounded interest.
Interest compounding, where interest is added to the principal amount of a loan, creating a larger debt over time, can be direct or indirect. Direct compounding generates new interest from delayed payments, while indirect compounding incorporates delayed interest into the capital, thus increasing the total borrowed amount. This mechanism, while reflecting the productive dynamic of capital and providing compensation for lenders, can also pose a significant burden on borrowers when not adequately regulated.
Efstathiou’s concern is that without legislative regulation, compounded interest can lead to over-indebtedness and contradict principles of good faith and non-abusive rights exercise by financial institutions. The bill aims to address and mitigate these issues by preventing banks from further increasing a debtor’s obligations through the capitalization of compounded interest.
The proposal has sparked anticipation of strong resistance from credit institutions and the Central Bank when it undergoes discussion in the parliamentary committee. Various countries have different approaches to interest compounding and capitalization. For instance, Austria and Belgium have consumer protection measures in place against excessive interests, while Greece allows capitalization under certain conditions. Other nations like Spain and Lithuania regulate compounding through their civil codes or specific agreements.
Efstathiou’s initiative responds to a study by the Parliament’s Research and Studies Sector, which highlighted the disparity in international practices related to compounded interest. The proposed legislation in Parliament could set a precedent for the protection of consumers and reshape lending practices, balancing the scales between lenders’ rights and borrowers’ capacities to repay their debts without falling into excessive indebtedness.
