THE CENTRAL Bank of Cyprus (CBC) has issued a new Directive on Arrears Management 2013 under section 41 of the Banking Laws of 1997-2013 regarding arrears management and restructuring of bank customers’ debts. This specific Directive applies to all banks, credit institutions licensed by the CBC and to all branches of international banks operating in Cyprus.
Specifically, Section 2 of the Directive relates to the approach to multiple creditors/banks. It appears that many borrowers may have various loans with multiple creditors, which can take diverse forms and may include, inter alia, other financial institutions and other types of creditors (e.g. trade creditors, workers, tax authorities, etc) that may be secured or unsecured. Such multiplicity of creditors may lead to complexity in finding a sustainable debt restructuring solution for the borrower.
According to the CBC, banks based in Cyprus should collaborate and be transparent during the debt restructuring process, having due regard to the following:
- Banks/creditors acting independently and solely in their own interest may aggravate the difficulties for the borrower and lead to further problems in the servicing of their credit facilities.
- In order to avoid the multiple impacts of bankruptcy on all creditors, the interests of both secured and unsecured creditors shall be considered in the development of a restructuring solution that is thus viable and sustainable;
- Collaboration between the broader group of creditors is beneficial if it provides for burden sharing arrangements and minimisation of the overall costs.
Also, CBC recommended to the banking institutions to incorporate in their policies international best practices in this respect, such as:
- Where a debtor is found to be in financial difficulties, all local and relevant creditors should be prepared to cooperate with each other, to give sufficient though limited time (a “standstill period”) for information about the debtor to be obtained and evaluated, and for proposals for resolving the debtor’s financial difficulties to be formulated and assessed.
- During the standstill period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt/asset to a third party) to reduce their exposure to the debtor, but are entitled to expect that during the standstill period their position relative to the other creditors will not be prejudiced.
- During the standstill period, the debtor should not take any action that might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the standstill commencement date.
- The interests of relevant creditors are best served by coordinating their response to the debtor. Such coordination may be facilitated by the setup of one or more representative coordination committees and by the appointment of professional advisers to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole.
During the standstill period, the creditors should require the debtors to provide, and to allow relevant creditors and their professional advisors reasonable and timely access to all relevant information relating to their assets, liabilities, business and prospects, in order to enable the proper evaluation of the financial position and the development of sustainable proposals for all participating creditors.
The purpose of this Directive is the application by all banks of efficient and effective strategies, policies and mechanisms for the management of problematic lending situations and the attainment of fair and viable restructurings of loans of borrowers with financial difficulties. Note that as non-performing loans increase in Cyprus banks borrowers also need to understand these directives and demand from banks to be restructured based on these guidelines.
Strong efforts were made by Troika to maximise bank recovery rates for non-performing loans, while minimising the incentives for ‘strategic defaults’ by borrowers (both commercial and residential loans). Troika indicated that the administrative hurdles and the legislative framework currently constraining the foreclosure and sale of loan collateral should be amended so that the property pledged as collateral can be foreclosed within a maximum time-span of 1.5 years from the initiation of legal proceedings. In the case of primary residences, this time-span could be extended up to 2 years.
It is stated in the MoU that the necessary legislative changes will be implemented by end of 2013, macroeconomic conditions permitting. We believe that the time span for the eviction from primary and secondary residences will be subject to a significant debate as there are significant social and financial implications associated with it. Also, we believe that given the present economic conditions in Europe and specifically in Cyprus, it is not in the banks’ interest to repossess such assets as the property prices have significantly dropped, something which will impact capital levels and profitability. However, we believe that new directives and ‘mortgage rescue schemes’, such as the ones applied in the UK, should be used and should strongly supported by the government.
Dr. George Mountis
Regional Managing Partner
Banking | Wealth & Trust | Asset Management advisory
P.P. (The Parthenon Partners) & Co
Tel: + 357 – 99 49 41 42