Audit Office: Consumer loan sector needs more effective supervision

Money. Source: Siim Lõvi/ERR

In its latest audit, the National Audit Office of Estonia has found that significant improvements are required in the supervision of credit providers not associated with banks.

According to a National Audit Office (NAO) press release, this would ensure that loans are not granted too readily, as well as enable a thorough assessment of the creditworthiness of consumers in accordance with established regulations.

While the Estonian Ministry of Finance acknowledges the frequent difficulties people face when repaying non-bank consumer loans, policymaking and supervision in this area has so far been relatively modest. In addition to enhancing the oversight of non-bank lenders, it is crucial to assist individuals in accurately assessing their financial capabilities.

The National Audit Office (NAO) of Estonia conducted an audit to determine whether the supervision of consumer credit adequately safeguards consumer rights. The audit also assessed whether the state has made efforts to enhance public awareness about the risks associated with financial obligations.

According to the audit, the current legal framework fails to encourage responsible lending, and the supervision of non-bank consumer credit providers has thus far proven insufficient in preventing irresponsible lending to individuals with questionable repayment capacities.

Märt Loite, auditor general of the NAO's Analysis Department identified several issues related to responsible lending.

"Lenders should prudently evaluate borrowers' ability to repay their loans. Acquiring a consumer loan should not be too easy, primarily for the consumer´s benefit. The rules used to assess individuals' creditworthiness are intended to shield them from aggressive loan offers and enticing borrowing practices employed by creditors, as well as protect them from their own miscalculations," Loite said.

"Moreover, the supervision of consumer credit advertising, especially online advertising, is lacking, and direct mail cannot be restricted. Creditors should inform consumers about the potential implications of their obligations, ensuring they understand the associated risks. At the same time, consumers have to make realistic assessments of their financial capacities. Once arrears (start to) accumulate, debts escalate, and debt collection agencies come knocking, it is already too late to evaluate the risks," Loite added.

He also said, that while the number of individuals experiencing difficulties repaying debts varies over time and differs according to circumstances, in general, nearly a quarter of credit agreements with non-bank creditors involve delayed repayments.

According to the press release, statistics indicate that bank customers repay their loans more adequately than customers of creditors, which are not associated with banks.

The Estonian Financial Supervision Authority's (FI) report for the last quarter (Q4) of 2022 shows that by the end of that year, only 6 percent of loans from bank associated creditors were overdue. This is in contrast, 22 percent of loans from non-bank lenders.

It is also important to recognize that consumer loans from creditors not associated with banks, generally involve smaller amounts, shorter terms, higher interest rates, and consequently, higher annual percentage rates (APR), than loans taken from banks and bank-associated creditors.

The interests and rights of customers and debtors are less protected than those of creditors and debt collectors, as decisions made by the Consumer Disputes Committee are legally non-binding.

In expedited order-for-payment procedures, courts are not required to verify the legal basis for debt collection if no objections are raised by the debtor. Debt buying occurs without state oversight. If creditors can easily and profitably transfer credit agreements with weaker borrowers by selling them to debt collection agencies, this reduces the creditors' risks and may diminish incentives to thoroughly assess customers´ creditworthiness before granting loans.

Although the numerous bottlenecks and risks in the consumer credit regulations are known, attempts to address them through legislation have frequently stalled. Delays occur either during the legislative coordination process between ministries, where the immaturity of the draft resulted in prolonged coordination periods, or in the parliamentary proceedings, due to uncertainties arising from legal disagreements.

Consequently, the transformation of the legal framework in this field has been sluggish and protracted, resulting in materialized risks and harm to consumers, depositors, and investors. In the view of the NAO, it should therefore be acknowledged, that even if the necessary legal framework were to be devised, implementing it, developing technical solutions, and so on, would take years.

According to the NAO, the current tools employed by the Financial Supervision and Resolution Authority and the Consumer Protection and Technical Regulatory Authority (CPTRA) have limited use and impact. The likelihood of initiating misdemeanor proceedings against creditors for their violations has been minimal.

For a number of years, the CPTRA has neglected to verify whether non-bank lenders fulfil the requirements concerning pre-contractual information provided to loan applicants. Monitoring of consumer credit advertising has been largely based on complaints. Only a relatively small share of non-compliant ads displayed online and on social media have been removed.

In the view of the NAO, to ensure adherence to responsible lending principles and consumer protection, it is imperative for the Financial Supervision and Resolution Authority and the CPTRA to deploy all available supervisory tools.

Additionally, the extent to which recent legal changes regarding misdemeanor proceedings guarantee effective penalties for violations of responsible lending principles must be monitored.

The NAO recommends that the Estonian Ministry of Finance assume a more active leadership role and responsibility for establishing an environment that discourages a disregard for responsible lending principles, as well as uses supervisory tools, which ensure better protection of consumer rights and interests.

Targeted efforts should be made to enhance financial literacy among adults, particularly those in financially disadvantaged situations. This includes raising awareness about credit risks and debt accumulation, as well as informing people about available debt counselling services in case they encounter financial difficulties.


The National Audit Office's (NAO) audit focuses on creditors not associated with banks, which primarily offer unsecured small loans (72.6 percent of the number of contracts) and instalment payments (26.4 percent).

As of September 30, 2022, the outstanding balance of loans from non-bank lenders amounted to €259 million, compared to €263 million on March 31, 2023.

Between 2019 and 2022, the proportion of loan payments, which were overdue by more than 30 days, indicating late payments, ranged from 12 percent to 18 percent. Additionally, loans with payment deadlines within 30 days constituted approximately 11 percent of the total number of loans.

As of September 30, 2022, non-bank lenders had almost 80,000 overdue loans, accounting for 29 percent of the total number.

The full audit can be found (in Estonian) here.


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Editor: Michael Cole

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