THE TROIKA of international lenders is increasing the pressure on delinquent borrowers through the updated MoU issued following the conclusion of fifth review of the Cyprus €10 billion bailout.
The lenders’ suggestions come as non-performing loans (NPLs – loans in arrears over 90 days) in the Cyprus banking sector reached €27.5 billion in May.
The Troika, comprising the European Commission, the European Central Bank and the International Monetary Fund (IMF) believe that the way forward with regard to the containment of the rising NPLs is debt restructuring through the bank’s internal restructuring units under the guidance of the Cyprus Central Bank (CBC).
However Cyprus lenders (notably the IMF) believe that the extent of the rise in NPLs is partly due to strategic defaults and delinquent borrowers, who refuse to service their loans despite having the ability to do so.
According to the fifth update of the MoU, the CBC will issue revisions of the Arrears Management Directive and of the Code of Conduct on Arrears Management by end-November which will assist only households and small and medium-sized enterprises.
“The revised Code of Conduct will target only households and Small and Medium-Sized enterprises,” says the MoU.
The amendments will include specific procedural steps and precise deadlines attached to them, facilitating swift procedures within an appropriate time limit with clear start and end date to the restructuring procedure.
The CBC will also incorporate in the Code of Conduct and definition for a unified measure of viability based on a reasonable standard of living as defined in the insolvency framework.
Furthermore, “to ensure that the banks are held accountable for offering sustainable restructuring solutions,” the CBC will issue specific guidance to banks on operational and financial indicators, such as the ratios of proposed, concluded and successful restructurings as well as on tools to determine the capital cost of restructuring solutions by the end of October.
The MoU stipulates that legal amendments to the law on financial ombudsman will be adopted in order to clarify that the responsibility for assessing compliance with the Arrears Management Directives is not transferred to the mediators but remains with the CBC.
However the updated MoU features elements that will increase pressure on delinquent borrowers.
The Cypriot authorities are called on to allow lenders to obtain adequate updated information on the financial situation of delinquent borrowers under sufficient safeguards via court order if necessary.
For this reason, the authorities will engage an independent legal consultant to provide a report by end-October to identify the needed legal amendments. The authorities will develop a time-bound action plan by end-November and start its implementation by December.
Furthermore, the authorities with the assistance of an independent legal consultant will prepare a study by end-October and a time-bound action plan by end-November for removing impediments for lenders to file for, and obtain, an attachment of financial assets and earnings of delinquent borrowers as well as to realise such attachment to satisfy their claims under sufficient safeguards. According to the MoU, the implementation of this action plan will start by December.
Market for distressed assets
Based on the MoU, “in order to encourage a market for distressed assets and to facilitate the issuance of securities by securitisation vehicles, the authorities will allow and facilitate lenders to transfer existing individual loans together with all collateral and securities to third parties at minimal transaction costs without having to obtain the consent of the borrower.”
“Any information obligation of the creditor should not be an impediment for the transfer and or securitisation of loans,” the MoU adds.
With this objective in mind the MoU notes that the Cypriot authorities will establish a task force, consisting of relevant stakeholders from the public and private sectors, which will finalise an assessment of existing impediments and of required legislative amendments by end-November. The assessment will include a review of the regulatory framework for non-bank third parties.
The identified impediments will be removed and legislative amendments made by the end of January 2015.
– Cyprus News Agency