New NPLs legislation to reduce debt mountain
A framework to speed up repossessions and protect borrowers is in place
Banks and bad-debtors woke up to a new landscape regarding debt management after parliament urgently passed a set of laws paving the way for faster procedures regarding foreclosures.
The country’s banking institutions eagerly awaited this development, arguing that the previous framework was essentially a dampener on their efforts to reduce their NPL portfolios.
Banks will now test the legislative changes to whether they have closed the loopholes and can speed up cumbersome procedures.
The new legislation voted in by Cypriot MPs, in theory at least, should speed up the legal procedures for foreclosures and create the conditions for the restructuring of loans of borrowers.
However, the insolvency framework has been sent back to parliament for review by President Nicos Anastasiades because part of it concerning receivership status and bankruptcy is deemed “unworkable” and “unconstitutional”.
Nevertheless, the new legal framework is expected to provide better solutions to banks on issues causing lockjaw in the system.
Head of the Bank of Cyprus Economic Research Department Ioannis Tirkides, said it is imperative that non-performing loans are restructured in a timely manner and those that are deemed unsustainable should be put under recovery.
“A fair and balanced incentive framework should achieve this result relatively quickly”.
Tirkides said that the newly introduced legislation will bring about changes in repossessions and the insolvency framework allowing banks to be more effective in managing strategic bad-payers.
“The process is further accelerated as it is combined with the support plan for vulnerable layers of society, dubbed as ESTIA (Home) and the loan securitisation law. These changes are expected to help banks’ efforts to reduce their non-performing loans to gain speed,” said the economist.
He said obstacles that could delay the process have now been removed, such as the suspension of the foreclosure processes, as now a judicial decision is required to suspend such a process.
Tirkides added that even the way the notice is served has changed, speeding up the procedure. He explained that whereas prior to the changes, the notice had to be handed to the owner, who in many cases was hard to locate, it can now be served by posting it on the property itself.
He argued the overall result is that a better balance of incentives is achieved, and stakeholders have more reasons to reach an agreement on the restructuring of nonperforming loans.
“It should also be noted that the new laws are more in line with international practice, which is even more stringent in terms of keeping to timetables.”
New legislation does away with another grey zone in court cases regarding foreclosures currently underway, as they will also be trialled under the new legal framework. Opposition party AKEL had demanded that an amendment foreseeing that cases currently in courts be trialled under the old framework.
The new framework ensures the process of selling mortgaged property being differentiated as time periods are clearly set for the reserved auctioned.
For a period of three months from the completion of the first auction, a reservation price is set which is no less than 80% of the market value of the mortgage, regardless of the method of sale. Over the following threemonth period, a reserve price of no less than 50% is to be applied.
The new legal framework also foresees changes in the packaging and sale of loans. All collateral for loans bought is transferred to the buyer. Borrowers’ benefits, as well as their obligations, is ensured. Also, the buyer is to have access to all documents relating to the loan agreements and acquires the right to clear off deposits and debts of the borrowers.
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MPs also voted in the state guarantees towards Hellenic Bank for EUR 2.6 bln, to cover possible default of loans taken over from the Co-op. State guarantees coupled with the NPLs legislation were directly tied to the Hellenic-Co-op deal, and failure to pass them would have jeopardised the entire banking system.
With the deal approved Hellenic Bank is set to take over the country’s biggest deposit portfolio which amounts to EUR 9-10 bln and the acquisition of a portfolio of EUR 4.5 bln in good loans. Thus, it is expected that HB is to see its NPL ratio drop significantly.
Hellenic CEO Ioannis Matsis in his speech to shareholders this week said the bank stic retail banking business with the agreement to acquire Co-op assets. Completion of the agreement, he noted, will completely change the bank and its future potential.
Hellenic Bank’s market share in serviced loans will triple from 7% to 22% while its share of deposits will increase from 12% to more than 30%.
Also, the non-performing loans ratio will decrease from 52% to around 25%, while the coverage ratio of NPLs with provisions will remain at a high level of 60%.
Additionally, after the agreement is completed, the Hellenic will continue to maintain its strong liquidity position, with the net lending to deposit ratio expected to be less than 50%, allowing it to further support its clients’ financing needs and providing the necessary security to depositors.
According to bank data, total loans restructured by the end of March 2018 amounted to EUR 11.39 bln, of which EUR 8.26 bln were still included in nonperforming loans, partly due to the definition of non-performing loans.
Moreover, the banking system was given extra breathing space after MPs voted for the creation of an NPL managing body within the framework of a state scheme dubbed ‘ESTIA’.
The body is to absorb a big chunk of the bad assets of the Co-op and possibly, in the future, NPLs belonging to the rest of the island’s banking system, contributing to making it healthier.
The government said the ESTIA scheme is designed to help struggling borrowers repay their loans. “It can provide a reduction of up to 50% in their debts, coming from partial debt relief and subsidising of interest rate owed,” said a senior finance ministry official last week.