BANK customers face punitive surcharge interest rates of up to 27.05% on overdrawn and “out of order” current and loan accounts from Monday week.
AIB’s surcharge rates, which will rise by 33%, have been approved by the Financial Regulator and it is expected other financial institutions will follow suit.
The stealth increase by the country’s largest bank comes as the European Central Bank (ECB) gave the strongest indication yet that it will raise interest rates from next month.
ECB president Jean- Claude Trichet shocked the markets yesterday when he warned the bank could be forced to raise interest rates to combat the fastest inflation in 16 years.
Economist Alan Ahearne, of Galway university, said he expected the ECB to raise rates at least once, if not more, in the months ahead. It was expected that the ECB would cut rates towards the end of this year or in early 2009 as the economy continued to slow.
The interest rate hike will put extra pressure on homeowners.
Should they fail to meet their repayments, they face a double whammy.
UCD banking professor Ray Kinsella said the surcharge increase is indicative of the pressure on banks to increase fees and charges to bolster falling profits as borrowing growth slows.
“These measures are unjustified, short-sighted and will be counter-productive. They are bad news for consumers and the economy. The banks played a very significant role in doling out all kinds of loans, 100% no interest mortgages and so on,” he said. “They can’t turn around now and bring in massive surcharges when they are under pressure. This is not just about tightening up credit procedures, it’s all about profits,” said Prof Kinsella.
A typical AIB personal account holder with an approved overdraft, who breaches their withdrawal limit, will pay 27.05% on the excess borrowings from June 16 next. This is made up of the standard overdraft charge of 15.05%, plus the increased surcharge rate of 12%. The surcharge applies to all “out of order” accounts. AIB is expected to make close to 2.5 billion in pre-tax profits this year, according to stockbrokers Merrion Capital.
AIB said the surcharge interest rate increase from 9% to 12% reflects the increased costs faced by the bank in the credit management of the “out of order” accounts. The 12% surcharge will also apply to “out of order” term loan accounts with rates of between 7.99% and 12.59%.
“This is not a significant revenue stream for the bank, but is designed to recover losses when administering these accounts,” it said.
Prof Kinsella rejected the notion that the sums generated by the bank from the surcharge increase will be insignificant, pointing out that 40% of Irish bank profitability is generated in the domestic market.
The Financial Regulator said some banking charges, like those for unauthorised overdrafts, can be expensive and if incurred regularly, can become significant.
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