How non-bank credit providers will facilitate red-loan arrangements and finance businesses with old debts. What the bill of the Minister of Finance provides for.
A new financial tool, which will allow borrowers with “red” loans to repay them and achieve partial debt forgiveness, is coming in the near future to the Greek market by specialized credit companies. The same financial institutions will also be able, as envisaged in the relevant bill of the Ministry of Finance, to provide financing to companies with ‘red’ loans that are under the management of servicers and which cannot currently find outlets for borrowing.
The government has decided to extend the scope of activity of non-bank credit providers, which have become highly mobile in Europe and provide a large proportion of total financing, in order, inter alia, to fill a significant gap that currently exists in the market and has been repeatedly highlighted by the Bank of Greece.
Under the relevant legislation, servicers are allowed to request a special licence from the BoG to provide financing to companies and individuals with ‘red’ loans managed by servicers.
However, servicers have not made use of this institutional possibility, nor do they intend to do so in the future, with the result that borrowers, businesses and individuals, who have loans under servicer management, totalling EUR 89,4 billion, are in a financial ‘grey zone’, with no financing possibilities. As noted in the latest Financial Stability Report, “the Bank of Greece has licensed a total of 26 Loan and Credit Claims Management Companies (LCRCs), of which 23 are currently operating. It is clarified that to date, no CDDC has applied for a licence to refinance claims’.
With the Finance Ministry’s bill transposing the EU directive on servicers into Greek law, the government seeks to fill this gap by providing additional opportunities for the development of activities of non-bank credit providers, i.e. essentially specialised funds that will be able to provide financing without being banking institutions with the ability to raise deposits from the public.
What the Bill provides for
As stated in the text of the draft bill that was submitted for consultation,
“Credit societies shall be established and operate in the form of a public limited company or a European Company (SE) within the meaning of Council Regulation (EC) 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) (L 294), with its effective and registered office in Greece. Credit societies provide credit of all kinds to natural and legal persons, including mortgage loans, as follows:
(a) as regards the granting of loans to legal persons, the granting of credit shall relate either to the refinancing of an existing loan granted by another credit or financial institution or to the granting of credit to a creditor whose loans are in the process of being adjusted or for the purpose of restructuring the borrower’s undertaking,
(b) as regards the granting of loans to natural persons, the granting of credit concerns the restructuring of an existing loan of the borrower granted by another credit or financial institution.
Discounted Pay Off and business financing
For borrowers, both individuals and businesses, the new regulations pave the way for them to finance the repayment of non-performing loans by partial debt write-off by taking out a new loan. This is, as BD has written, a well-established practice in many countries, Discounted Pay Off (DPO).
The mechanism of this financial instrument is essentially simple: a servicer can offer a significant percentage of debt forgiveness, particularly when it is a one-off settlement. However, the borrower in many cases does not have the option of a one-off repayment, and may find it difficult to service a long-term arrangement, for which he or she will have to pay an upfront payment and additional interest, which may even increase the settlement amount by more than 50% (e.g., instead of paying a one-off payment of €10,000, the borrower pays €15,000 for a five-year arrangement).
Thus, as it stands so far, even if the servicer offered the borrower a settlement proposal with a “haircut”, the debtor might not be able to proceed with a one-off payment that would bring him the greatest benefit, and might not even be able to settle the debt with a long-term arrangement.
This is the area where credit companies are expected to develop their activity, providing a new loan to repay the old loan, without the same restrictions that apply to banks in terms of financing individuals and companies with adverse financial behaviour.
This does not mean, of course, that credit companies will grant loans without taking into account the basic financing criteria: loans for Discounted Pay Off will be granted after the borrower’s financial and asset capacity has been assessed, but with the advantage of significant debt write-offs. In other words, if everything works right, this scheme will form a presumably viable debt arrangement.
In addition to Discount Pay Off, credit providers will also enter another important field, the financing of businesses that have settled their debts and are servicing these arrangements without any problems.
Until now, businesses in this category have faced a fairly serious difficulty: although they may be punctual in repaying their old debts, banks and servicers do not provide them with new financing (for example, for working capital), with the result that their growth trajectory lags behind their actual potential.
Credit providers will be able to provide loans in these cases, possibly in combination with a provision of Discounted Pay Off financing, in order to achieve an overall solution of financial consolidation and growth financing for the company.
It is noted that all these new possibilities for credit companies will start to be developed from the beginning of 2024, as, following the adoption of the Finance Ministry’s bill, the Bank of Greece will also have to specify the rules for the operation of the companies. However, there have already been “fermentations” in the market and it is expected that very soon credit companies with this new profile of activities will start operating in Greece.
