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Dealing with Private Debt and Non-Performing Loans: A Comprehensive Blueprint

15/03/2018

The excessive private debt burden of households and businesses and the stubbornly high levels of non-performing loans are on top of everybody’s agenda these days, as they should be in light of their strategic importance for the country. 

2018 will be, one way or the other, a milestone year for local banks on both fronts. Despite the inroads made to date, the situation is not self-healing and far-reaching decisions ought to be taken.  If they are not, the long-term stability of the financial system may be put at risk and the impressive rebound of our economy may be jeopardised.

Solutions to the problems cannot be developed in isolation.  A multi-disciplinary approach is required, which must be finely balanced so as not to jeopardise the current state and the potential of the economy, the public finances, the stability of the local financial system and the well-being of the country’s people. 

Debt levels must be managed to match viable borrowers’ debt servicing capacity; this is the only way of converting unsustainable debt to sustainability.  At the same time, those borrowers who are exploiting the prevailing system’s weaknesses at the expense of their fellow citizens must be exposed and efficienty dealt with.  A much needed revamp of the facilitating framework, the insolvency, enforcement and judicial regimes in particular, is therefore imperative.

Above all, what is required is a strategic view which shall be led and driven by a governing body of experts.  This govenring body shall be fully accountable for progress and results via disciplined, pre-defined milestones and timelines. 

A comprehensive blueprint (“business plan”) must be drawn up, instead of a piecemeal approach, with specific pre-agreed milestones (short-term, medium-term and long-term objectives, detailed output deliverables, pre-defined timelines and the set-up of expert teams accountable for each output deliverable).

A specimen blueprint is provided below, broken into distinct but inter-related step components,by way of indication of the multi-disciplinary approach that ought to be followed.  Such high-level blueprints can act as the basis for further technical analysis and expert discussions on each of the constituent components to arrive at a country-level resolution policy.

The specimen blueprint comes in two parts, the Core Key Portfolio Management Solutions on the one hand and the Peripheral Framework Facilitators on the other.  The two parts are intrinsically inter-linked and should, as a result, run in parallel.

PART 1

THE CORE OF THE BLUEPRINT: KEY PORTFOLIO MANAGEMENT SOLUTIONS

Step Component 1:  Full Viability and Debt Servicing Capacity Study for all NPL Borrowers

  • Under full, uniform regulatory supervision
  • Using a group of standardised and simple metrics criteria
  • Possibly outsourced to experts with pre-defined deadlines
  • Primary Aim: to ascertain the viability and the maximum sustainable debt capacity of each borrower

Step Component 2: Borrower Segmentation

  • Based on the nature of the borrower, the results of the study under step component 1 and the primary collateral:
    • Households, Micro, Small and Medium Enterprises (collectively described as ‘Households and SMEs’):
      • viable but over-leveraged, viable, non-viable
      • primary residence as collateral or not
    • Large Corporate Enterprises:
      • Viable, non-viable

Step Component 3: Viable but Over-Leveraged Households and SMEs

  1. Primary Residence as Collateral à Public-Private Participation, Centralised Asset Management Company
    • With strict onboarding criteria (size, time cut-off)
    • With due consideration to State Aid rules and the Bank Recovery and Resolution Directive
    • Portfolio to be outsourced to Independent Specialised Debt Servicers who will utilise standardised restructuring solutions, assessment and decision processes
    • Primary Aim:to reduce debt burden, workout debt to make it sustainable by loan tranching
  2. Primary Residence not as Collateral àInternal bank-specific workout OR Independent (possibly common / shared) Private Debt Servicing Platforms
    • Multi-banked borrowers to be worked out under a CBC-led Round Table (obligatory)

Step Component 4: Non-viable Households and SMEs

  1. Primary Residence as Collateral àPublic-Private Participation, Mortgage to Rent Scheme
    • Strict onboarding criteria (income and asset-value related)
    • Primary Aim: sale and lease-back, at a manageable rent, of the primary residence, with option on the borrower to repurchase
  1. Primary Residence not as Collateral àPublic-Private Participation, Centralised Asset Management Company
    • With optional onboarding
    • With due consideration to State Aid rules and the Bank Recovery and Resolution Directive
    • Portfolio to be outsourced to Independent Specialised Debt Servicers
    • Potential set-up of Real-Estate Investment Trust / Fund to bundle real estate assets
    • Primary Aim: to recover / collect the debt

Step Component 5: Viable Households and SMEs and Large Corporates

  • Internal bank-specific workout OR Independent (possibly common / shared) Private Debt Servicing Platforms (as per Step Component 3.ii. above)
    • Multi-banked borrowers to be worked out under a CBC-led Round Table (obligatory)

Step Component 6: Non-viable Large Corporates

  • Public-Private Participation, Centralised Asset Management Company (as per Step Component 4.ii. above)
    • With optional onboarding
    • With due consideration to State Aid rules and the Bank Recovery and Resolution Directive
    • Portfolio to be outsourced to Independent Specialised Debt Servicers
    • Potential set-up of Real-Estate Investment Trust / Fund to bundle real estate assets
    • Primary Aim: to recover / collect the debt

Step Component 7: Non-cooperative Borrowers (Households, SMEs, Large Corporates)

  • Borrowers who are classified, at any stage, as non-cooperative to be immediately dealt with enforcement / foreclosure actions (may be, optionally, transferred to the centralised Asset Management Company (as per Step Components 4.ii. and 6 above)

PART2

THE PERIPHERY OF THE BLUEPRINT: FRAMEWORK FACILITATORS

Framework Facilitator 1: Assertive and Intrusive Supervision

  1. Increased provisioning requirements (where required)
  2. Obligatory time-bound write-offs (accounting or contractual)
  3. Meaningful monitoring metrics, eg:
  • viability and debt sustainability studies
  • cash collections
  • roll-over and roll-back matrices
  • restructuring vintage analysis
  • sectoral NPL targets
  1. Recalculation of loan balances @ 2% default interest from origination
  2. Central, homogeneous, repository / warehouse of NPL data
  3. Much stricter new lending on-site and off-site monitoring
  4. Drive banking sector consolidation (fewer banks)
  5. Monitoring / leadership involvement in multiple-creditors’ procedures

Framework Facilitator 2: Insolvency and Judicial Framework Revamp

  1. Balance debtors' and creditors' rights
  2. Remove / smoothen out legislative impediments / hiccups to make framework efficient and effective
  3. Introduce court specialisation, eg corporate and retail insolvency courts / benches
  4. Introduce electronic court case management
  5. Introduce electronic auctions
  6. Legislate time-bound court hearing threshold benchmarks (with maximum time cap)
  7. Provide additional legislative tools to make the resutructuring and / or the resolution process more efficient, eg:
  • Include state authorities (tax, social security) in the insolvency regime / restructuring efforts
  • Legislate so that guarantors are not required to sign for debt restructuring agreements
  • Legislate so that memos, which are a major stumbling block, are satisfied in line with their priority rank under corporate receiverships and liquidations and personal bankruptcy
  • Legislate so that foreclosures are not hindered due to the existence of a court order for the sale of the collateral under the previous regime
  • Clear backlog of existing liquidation and bankrupty orders by ousourcing to the private sector
  1. Provide additional legislative tools to make enforcement / resolution more efficient, eg:
  • Compulsory Examinership and Personal Repayment Plans upon certain criteria met (with no room for objections)
  • Punitive actions for fraudulent directors / shareholders / borrowers and for asset stripping
  • Legislate punitive actions and heavy penalties for directors/shareholders who do not prepare audited accounts
  • Forced debt for equity swaps (incumbent non-cooperative shareholders to be wiped out by court order, subject to criteria)

Framework Facilitator 3: Use and promote arbitration instead of the backlogged court system

Framework Facilitator 4: Create a fully-fledged credit buraeu

Framework Facilitator 5: Provide subsidised credit counselling to households and SMEs

Framework Facilitator 6: Loans Securitisation legislation

 

Renos Ioannides
Financial Analyst
[email protected]