CYPRUS: Banks’ internal procedures delay NPL restructurings

According to Dr. George Mountis, Managing Partner at Delfi Partners & Company, the complex internal procedures undertaken by the banks are delaying the restructuring process of non-performing loans (NPLs). Delfi Partners & Company represents a broad range of clients in the negotiations for the restructuring of their credit facilities with financial institutions in Cyprus, Greece and SEE.

A reduction in interest rates, a write-off of default interests and overcharges, in combination with the modernisation of the existing insolvency and foreclosures legislation and the optimisation of the current procedures of the Central bank, as well as those of the commercial banks could constitute a large step forward in dealing with the NPL problem currently plaguing the banking and financial system in Cyprus.

In what way is your company involved with the loan restructuring process?
Delfi Partners & Company is an advisory, restructuring, transaction management and real estate advisory firm, consulting individuals, corporations and financial institutions. Our client base benefits from our ability to offer advice based on rigorous and systematic research and analysis on a broad range of services and solutions for individuals, financial institutions and corporate customers.

In the financial sector, Delfi Partners & Co offers optimization services such as:

  • Debt (re)negotiation with lenders and trade creditors (loans, credit facilities, foreign currency loans, etc)
  • Restructuring planning/ strategy capturing strategic opportunities while simultaneously evaluating/ managing away from potential risks
  • Restructuring alternatives
  • Risk management
  • Portfolios Investment strategy for mortgaged property
  • Assessment of borrowers’ ability to service debt obligations
  • Recovery options and assessment of options available to the creditor in light of the current situation
  • Collateral management and optimisation
  • Independent Business Reviews (IBRs)

What do you think of the way financial institutions in Cyprus address the problem of non-performing loans?
Non-performing loans represent a major obstacle to the recovery of the economy and the real estate sector. Efforts are being made towards addressing the problem whilst significant improvements in the management of non-performing loans have been observed within all banks.

Within some banks, however, complex procedures that are in place are causing significant delays in the NPL restructuring progress. The Greek banks operating in Cyprus, partly due to the experience of their parent companies in Greece seem to be in a better position to respond, despite the fact that major decisions need to be processed in Athens.

At which stage of the restructuring process does the greatest delay occur?
Several delays are noted due in part to the regulatory process in place by the Central Bank of Cyprus (CBC), which requests several data to be reported prior to restructuring. Despite efforts to simplify this process, there is still significant room for improvement. The main cause of delay, from our experience, is due to internal decision-making processes of the banks, where several committees, set up to deal with various loan amount ranges, assess the restructuring proposals. Hence, further development and reorganisation is needed, especially concerning the decisions taken by senior management and committees which meet on a regular basis. Valuation of the mortgaged properties, the need for approvals by committees and data collection from principal debtors and guarantors are the key factors that impede the decision making process.

From your experience, which bank has handled the issue non-performing loans better for its biggest clients?
All banks have made an effort to simplify and adjust their procedural framework as regards to non-performing loans.
Bank of Cyprus made several changes to the team that manages its non-performing loans, as well as its internal procedural system. However, we still observe delays in the decision-making process of senior committees and the collection of information, which appear to be more demanding than those required by the Central Bank of Cyprus.
In addition, when it comes to matters like foreign currency loan restructuring, for businesses and private individuals alike, there are no clear-cut guidelines/policy in place internally at the bank which results in a time consuming and complex restructuring process. Nevertheless, due in part to the merger with Popular Bank, the Bank of Cyprus requires more time to transition post-merger, the process of which will hopefully lead to a smother and simpler NPL restructuring procedure.

Hellenic Banks’ new management team made several changes and a substantial progress regarding the matter, even though sustained delays are noticed, both the information gathering process and the decision making process. The bank needs to modernise its internal procedures so that it can process NPL restructuring at the same pace as the rest of the commercial banks in Cyprus.

The merger of Alpha Bank and Emporiki Bank has contributed significantly to the stabilisation of the restructuring process. The bank has effectively restructured numerous foreign currency loans, it responds more promptly to any issues arising and it is more proactive towards its clients. The parent company in Greece faced similar problems and its experience over the situation helped the bank to address the problem more easily. Like all other banks, Alpha bank needs to improve the restructuring and management of the problematic loans, including the management of the real estate portfolio currently on its balance sheet (the same of course applies to all the banks in Cyprus).
Over the last couple of months COOP has undertaken several organizational changes and as it appears it has achieved the most significant progress when compared to rest of the commercial banks. The progress appeared to be in the areas of internal decision-making in terms of the improvement in the restructuring of problematic loans and in the cultural issues of the bank. COOP has restructured more loans (mainly individuals and SMEs) than any other commercial bank lately even though it still needs development and modernization within its organisational structure (more trained staff).

Do you believe that in the upcoming months there will be a discharge of the relatively high levels of NPL’s?
The discharge of the high levels of NPL’s is particularly important for the recovery of the economy. There are a number of measures that can contribute significantly to the reduction of NPL’s, which require the contribution of both the commercial banks and the Central Bank. The decrease in interest rates, the write-off of default interests and overcharges on overdue loans, the modernization of the existing bankruptcy law and the smooth adaptation of the regulations by both the Central Bank of and the commercial banks can contribute significantly to the reduction of NPL’s in Cyprus. We estimate that there will be an improvement in the restructuring processes which will contribute to the discharge of the loans. However, we estimate that significant reduction of NPL’s in Cyprus will be feasible in more than just a few months’ time. The decrease in non-performing loans is connected with the recovery of the real estate market.

What is your opinion on the possibility of the formation of a so-called ‘bad bank’ or a company managing distressed assets?

The reallocation of distressed assets to an asset management company is a controversial issue not only in Cyprus but to the rest of the Europe as well, with various applications in Germany, Ireland, Spain and Portugal. There are two main methods for the reallocation processing.

As regards to the German method, the bank is split into ‘good’ and ‘bad’ and the shareholders of the ‘good’ bank (with performing loans) are also shareholders of the “bad” bank (with non-performing loans) and are also exposed to the future risk of default of those loans.

The Irish and the Spanish method, are cases where the distressed assets were transferred to a public company which is entitled to hold them for sale. In the case of Ireland, following the transfer of troubled assets, the “good” bank is exempt from any liability of the bad bank. The objective is the active and professional management and disposal of assets in order to maximize their recovered value. The disposal of property is likely to be made at a discount compared to the market value (assets in Ireland were sold up to 70% lower than their market value). The management should be controlled (with the help of external experts) and the Cypriot banks should have limited competence over the assets. Its successful implementation, depends on the extent of control by both the supervising authority and the commercial banks in the market.

What are the alternatives for the restructuring of large loans which must be taken into account by the banks in order to tackle the problem with the non-performing loans?
During 2014, the percentage of restructured NPL’s was very low, partly due to the rigid policies of banks. There are several methods that can be used by the financial institutions to restructure large loans and improve the sustainability of non-performing loans. Banks could secure the collection of significant amounts of the loans that are currently not being serviced (and, therefore, increase their revenues and liquidity), by managing their NPLs more efficiently. A more effective management approach comprises the restructuring of loans that are classified as non-performing but are still considered ‘viable’. “Smart” restructuring solutions include the exchange of assets for debt (debt for asset swap), the capitalization of debt (debt for equity swap) and the write-off of the default interests and overcharges on overdue loans of interest.

The financial institutions and the borrowers have many alternatives for addressing the problem of problematic loans:

  • Short-term solutions (5 years or less): Payment of interest only, lower instalment payments for a short period, grace periods, deferment of instalments, repayment of the balance that is in arrears and debt rescheduling
  • Long-term solutions: These are adjustments of over five years, and include a permanent reduction in the interest or on the contractual margin rate; switching the type of interest (e.g. from variable to fixed); and extending the loan repayment period.
  • Splitting a loan in two: The first portion of the loan is tied to physical collateral, where the borrower pays in instalments. For the second portion, or the balance on the loan (the unsecured amount), no interest is charged for a period agreed with the bank. On the latter, borrowers are subject to re-evaluation should their finances improve, otherwise they are required to take out a mortgage on another immovable property, that is to say, to put up other assets as collateral.
  • Operational restructuring: Concerns business loans for which a businessman is required to curtail spending and implement cost-cutting measures. Also debt/equity swaps.
  • Definitive restructuring: This involves drastic actions aimed at definitively tackling debt. Debtors voluntarily sign over to the bank their mortgaged property as part of a broader adjustment.

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