By Stelios Orphanides
The changes in the bills approved by the council of ministers aiming at helping reduce non-performing loans provide banks with effective tools and shield them from the need of further increasing provisions and the subsequent need to raise more capital, a finance ministry official said on Friday.
The bills are a product of consultations with all stakeholders, and have encapsulated recommendations made by the International Monetary Fund (IMF), the European Commission and are based on best practices worldwide, Andreas Charalambous, head of the finance ministry’s financial stability directorate, said in a telephone interview.
“If the framework is deemed effective, which it is very likely since we are in dialogue with them on the changes we proposed, this means that they are making assumptions on the recoverability from non-preforming loans will not be as aggressive as they are today which means that the need for provisions will be lower,” he said. “Today they are making very extreme assumptions which lead to large capital requirements.”
The bills provide incentives to borrowers to repay their loans, punishments for those who ignore their assumed obligations to the banks and introduce novelties, such as electronic auctions. They give banks more effective tools, including incentives at the negotiation table, Charalambous said.
“Existing legislations aiming at addressing strategic default need to become more effective,” he said and added that the changes would lead to more restructurings which is “for us the preferred solution”.
While “it is impossible for someone to quantify” the impact the bills will have on helping banks lower their €22bn non-performing loans mountain, “what one can see is whether the framework is improved,” Charalambous continued. “What’s important is that you introduce the right incentives. Those who can but do not pay will have an incentive either to settle their debts or face the consequences.”
The parliament’s approval of the new bills, which aim at addressing gaps in existing legislation are a condition for the European Commission’s sanctioning the deal signed by Hellenic Bank and the Cyprus Cooperative Bank earlier this week, transferring the latter’s operations and deposits to Hellenic.
The need for the deal resulted after stricter supervisory rules made a further increase in in the provisions for loan impairments by the state-owned lender necessary. The bank, which received in 2014 and 2015 a capital injection from the government of almost €1.7bn, was unable to tap fresh equity from the market while facing a non-performing loans ratio of roughly 60 per cent.
Charalambous warned that if following the parliament’s approval, the new framework is considered insufficient to help banks collect their non-performing loans, “we will then continue witnessing recommendations for capital increases which create the problems we are facing in the case of the Co-op related to its capital requirements”.
The proposals approved by the cabinet provide for changes in legislation on the transfer of immovable property, on the sale of loans, on insolvency and on companies, by speeding up foreclosure procedures, according to the Cyprus News Agency (CNA).
The parliamentary finance committee is scheduled to review on Monday the bills before they are put on vote on July 6.
According to the CNA, the proposed changes to the law on the transfer and mortgage of immovable property provide for electronic auctions of foreclosed properties, the abolition of provisions causing delays, changes in the way notifications from the lender are served and providing the lender access to a mortgaged property for the purpose of evaluating its value.
In addition, the bill provides for the fragmentation of a mortgage to cover several other lesser loan agreements so that no loans remain unsecured when the collateral becomes property of the buyer of a loan.
Other provisions change the process for the sale of a property and restrict the time in which a lender can acquire a property.
Also, the bill abolishes the preferential treatment enjoyed by borrowers whose primary home is worth less than €350,000 when their debt repayment is subsidised with taxpayers’ money.
The changes in the bill on the sale of loans introduces clarifications and amendments to the existing law and exempts the buyer from transfer fees resulting from the transfer of collateral. The bill also regulates several other aspects such as the transfer of rights and obligations, priorities, the continuation of lawsuits and the storage of documents. In addition, it also grants loan purchasing companies access to the data exchange system so that they can evaluate the solvency of borrowers.
According to CNA the proposed draft bill on insolvency clarifies definitions, abolishes certain criteria and expands others to make the framework more attractive and scraps the preferential treatment of government bodies when it comes to collecting of dues from persons entering a personal repayment scheme proposed by an insolvency consultant.
In addition, the bill terminates the protection enjoyed by borrowers receiving a subsidy to repay their loans after they are in arrears for three months.
The proposed changes in the company law aim at encouraging both borrowers and lenders to restructure corporate debt. They also ditch the preferential treatment of state bodies which they would enjoy if the borrower was placed in liquidation. Also in the case of companies, borrowers lose the protection of the law when they receive a subsidy to repay their debts and are three months in arrears.
Lastly, the changes provide for an increase in the commission received by insolvency consultants to 30 per cent from 20 per cent if the proposed personal repayment scheme is implemented, which will offer consultants more incentives to lead negotiations between borrowers and lenders to an agreement.