New interest rate law: restrictions on default interest rates and unilateral increases

The Liberalisation of the Interest Rate and Related Matters (Amendment) Law of 2014 (141(I)/2014) was published in the official gazette and came into effect on 9/9/2014. This legislation is an amendment to the Liberalisation of the Interest Rate and Related Matters Law of 1999 (160(I)/99), which had lifted many of the then applicable restrictions on interest rates charged by banks and other credit institutions in connection with credit facilities.

As explicitly provided in the 2014 legislation, its purpose is to protect the rights of debtors by prohibiting the unilateral increase of margin interest rates and by promoting transparency in interest rate calculations.

The new legislation imposes two important interest rate related restrictions on banks and other credit institutions, namely:

  1. The additional interest credit institutions can impose on arrears (default interest) can no longer exceed a maximum of two percentage points. In the event that the default interest exceeds the agreed interest rate by more than two percentage points, the credit institution must demonstrate that the default interest rate represents its actual loss. If it fails to do so, the relevant clause will be deemed invalid.
  2. A clause in a credit facility agreement which confers the right to unilaterally increase the margin interest rate on the credit institution is no longer effective.

The law also provides for greater transparency in connection with interest rate calculations.

It should be noted that the new law is applicable to:

  • both credit facility agreements currently in effect and agreements which are concluded subsequent to its enactment; and
  • business and consumer agreements.

These changes constitute a significant change in this area of the law as banks and other credit institutions had, since the enactment of the 1999 law, enjoyed considerable freedom in this respect.