When someone applies for a loan, the banks often present only the interest rates and a list including the value of all the monthly instalments to the last penny. Perhaps no one ever wonders how the bank actually calculates the interest rates. If the loan applicant asks the loan officers about the calculation formula, they will reply: “There is a computer formula and we only punch in the parameters, depending on the client (annual interest rates and the exact period).” Moreover, the foreign banks operating on the Romanian market say they receive the formula from the parent bank and then they apply it on this market, as well.
Nicolae Taran, a college professor from Timisoara and a former MP, claims that the way Romanian banks are calculating interest rates is not accurate.
For instance, he says that, under the simplified calculation method used to find out the monthly rates, the banks in the Romanian system divide the annual interest to the number of months. For instance, if the annual interest rate is 24%, the monthly rate will be two percent. However, Nicolae Taran says this formula is incorrect. According to the professor, a monthly 2% rate paid in the first month actually means an annualised interest rate sensibly higher than 24%, namely 26.82%. When the loan is big, this gap becomes very significant.
“Because of this incorrect calculation formula, the annual percentage rates (APR) used by the Romanian-based banks to calculate the interest rates that have to be paid monthly, which range between 26.51% (Romanian Commercial Bank – BCR) and 35.8% (Raiffeisen Bank) in the case of consumer lending, are actually much bigger than the annual interest rates stipulated in the credit contracts, namely rates ranging between 23.75% (BCR) and 31% (Raiffeisen Bank) for the consumer finance,” says Taran, who presented his point of view to the National Bank of Romania (NBR).
The calculation formula presented by the Timisoara-based professor is accurate. It is in fact a simple mathematical formula. But is his opinion on the rate calculation accurate?
Most of the bankers contacted by Ziarul Financiar say Nicolae Taran is wrong and claim that they are using calculation formulas that have been long employed by the banking institutions everywhere. On the other hand, Taran also claims that his own calculation method is being used by the international banks. He even says Great Britain is among the countries using the system he recommends.
Taran blames the National Bank for not “accepting to bring the Romanian banking norms in line with the Western standards.”
“I believe that one should not mistake the annual rate for the annualised rate. The Romanian banking system uses the annual rate, contracts are signed with reference to the annual rate, and not to the annualised rate. The annualised monthly rate points the loan applicants to the annual rate they should expect, starting from a fixed monthly rate. At the same time, the annual rate is a totally different thing,” says Adrian Vasilescu, advisor to the National Bank Governor Mugur Isarescu.
oana.nuta@zf.ro