Honohan warns over loan leniency

The State could be saddled with intolerably high levels of debt if banks are too lenient on borrowers, the governor of the Central Bank has warned.

Patrick Honohan said not enough has been done by banks to restructure people’s loans and make sure those in arrears who are now in a position to get back on track, do so.

“Too lenient an approach to loan recovery will result in an intolerably heavy bill for the Exchequer and hence the taxpayer and the user of public services,” Mr Honohan said.

“Too much reluctance to face up to reality about unsustainable debts will also delay the economic recovery.”

At an Oireacthas Finance Committee hearing, the governor said new personal insolvency legislation was a welcome measure to help distressed mortgage borrowers find a solution.

But he warned the new laws, which include a requirement for banks and lenders to help struggling homeowners with a debt write-down and to protect them from repossession, was an untested process.

“It would be better for all if the banks could still get ahead of the curve and resolve the bulk of the cases without them having to go through what is still, of course, an untested process,” Mr Honohan said.

He added that the Central Bank would work closely with banks to make sure they have their own policies and procedures in place to support struggling borrowers.

The new personal insolvency legislation, which passed through parliament last month, reduces the bankruptcy period from 12 to three years.

In some cases, it could also allow debts of up to €3m to be written off.