Before the financial crisis, thousands of borrowers across central Europe jumped to take out home loans denominated in Swiss francs, attracted by low interest rates.
The operations turned sour for the borrowers when the franc, a safe haven currency throughout the crisis, appreciated steeply against local currencies such as the kuna, in some cases doubling monthly loan payment amounts.
In its unprecedented decision, the Zagreb commercial court ruled the banks had violated consumer rights as they failed to provide a complete information to clients taking out the Swiss franc loans.
"The Swiss Franc by itself is not stable and this should have been said clearly," judge Radovan Dobronic said.
"The banks have an obligation to explain that risk to clients," he said.
The banks did not act "in good faith," he added.
More than 100,000 people in Croatia have taken out loans denominated in Swiss francs, almost three-quarters of which were to buy homes.
Deciding on the suit, filed by the consumer group Potrosac and the Franak client association, the court ruled that the banks should make the contract changes within the next 60 days.
Banks should also provide a fixed interest rate and base the recalculation of the principal amount on the exchange rate when the loan contract was made.
Most banks in Croatia stopped granting loans in Swiss francs in 2008.
"This is a victory although the verdict is not final . . . it definitely changes relations between banks and clients," said Petra Rodik of the Franak group.