HOW WILL THE COVID-19 RELATED BANK MORATORIUM ON LOAN PAYMENTS, PENDING FOR ADOPTION, WORK?
With its Decision of 02.04.2020 the European Banking Authority (EBA) adopted the Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis (EBA/GL/2020/02). The Guidelines define criteria, whose covering leads to the corresponding payment moratorium (legislative or non-legislative) being considered “general” and adopted with regards to the pandemic, therefore not leading to reclassification of the relevant expositions as restructured, as a result of default.
In this line of thought, it is important to note that there is no applied and active legislative loan payment moratorium in Bulgaria. As a temporary measure, it is only envisaged that consequences of payment delay to private law subjects, including interests for default and penalties, as well as non-monetary consequences of default – early termination of the credit, contract cancellation and others, shall not be applied. The postponement of loan payments can be achieved through the application of a non-legislative moratorium – adopted by the respective credit institution (bank/financial institution), as for the purpose of fulfilling the requirements, introduced by the adopted Guidelines, the moratorium should be general.
In accordance with the EBA Guidelines, the payment moratorium should be considered general when the following conditions are present:
- The moratorium is based on the applicable national law (legislative moratorium) or on a private initiative by the credit institutions (non-legislative moratorium) for the payment relief of an institution as a part of a certain industry or a sector-wide moratorium scheme, agreed upon and coordinated with the banking sector or a part of it, possibly agreed upon by the Public Authorities, so that participation in the moratorium scheme is open and similar payment relief measures are applied, according to the scheme, by the relevant credit institutions;
- The moratorium is applicable for a large group of Borrowers, defined by broad criteria, where every criterion for determining the scope of application of the moratorium should allow the Borrower to take part in the initiative without an assessment of his/her creditworthiness; examples of such criteria include: expositions class, industrial sector, product sphere or geographic location. The scope of application of the moratorium can only be limited with regard to duly performing Borrowers, who have not experienced difficulty in covering payments before the application of the moratorium and should not be limited only to those Borrowers, who have had financial difficulties before the COVID-19 pandemic;
- The moratorium only envisages changes to the payment schedule, calling off, postponing or reducing the principal payments, interests or full instalments for a predefined period of time; other conditions and loan agreements e.g. interest rate shall not be changed;
- The moratorium offers the same conditions for change of payment schedule to all expositions within its scope, even when the application of the moratorium is not compulsory for the Borrowers;
- The moratorium is not applied to new loan contracts, concluded after the date of its declaration;
- The moratorium is initiated in answer to the COVID-19 pandemic and was applied before 30.06.2020. This period is subject to change, depending on the development of the current pandemic situation.
Separate general payment moratoria can be applied towards various broad segments of Borrowers or expositions.
How will the bank moratorium work in Bulgaria?
On 03.04.2020, the Management Board of the Bulgarian National Bank (BNB) adopted a decision to comply with the European Banking Authority Guidelines. BNB has asked the commercial banks to propose for approval within 5 work days a single project of rules for a non-legislative moratorium on bank loan payments, in relation to the COVID-19 situation.
Upon approval by the Bulgarian National Bank, the rules, set up by the Banks, will allow – within their period of application – flexibility for the Banks to offer customers loan payments relief. In the coming days we will understand exactly which kind of mechanism for applying the moratorium on loan payments in Bulgaria will be approved; as according to the EBA Guidelines, this mechanism should be based on the following principles:
It is expected that the rules shall be applicable for the credit institutions (banks and other financial institutions), who have decided to enact a moratorium (grace period) on loan payments.
For the purpose of having the measure accessible for every person, eligible as per the rules for the measure’s application, each Bank, introducing a grace period on loan payments, must properly announce the conditions, the duration and the scheme for the grace period application. In the adopted EBA Rules and Guidelines, related to the COVID-19 pandemic, it is explicitly pointed out that consumer protection should be maximally ensured in the process. Especially, in view of the Borrowers’ interests protection, the latter should be made fully aware of the consequences from any undertaken loan terms amendments, rescheduling of loan obligations or any other measures; no hidden taxes should be applied, and the measures undertaken should not have a direct negative impact on the Borrowers’ credit rating.
The Borrowers – physical or legal entities, eligible as per the requirements – should be entitled to claim within a stipulated period the application of a moratorium (grace period) on their loan payments. To have the moratorium applied, the Bank should have taken decision on the relevant loan not later than 30 June 2020.
In order to assess the credit specifics and the individual payment capabilities of Borrowers, it is expected that different payment rescheduling schemes will be applied – covering the full loan amount (the principal and the interests), or the interests alone.
The application of the measure, as per the EBA’s Guidelines, should cover regularly serviced loans, on whose further payments the Borrowers are experiencing or are expected to face difficulties in meeting the terms of the concluded loan agreement with the Creditor, as a result of the COVID 19-pandemic. The measure should not apply for credits, which – by the time of the pandemic spread initiation and the state of emergency introduction – were already in default.
At the same time, it is important to note that as far as a time limit to the banks/the financial institutions for applying the procedure and making a decision was set up, i.e. 30 June 2020, it is recommendable for the relevant Borrowers to also evaluate their future capabilities for servicing the credit. E.g., even if to the present moment and/or near future they do not foresee difficulties in servicing their loans, they should assess their payment capabilities on a longer-term perspective, taking into account the unpredictable time span of the spread of COVID-19 and its consequences.
When applying the relevant loan rescheduling measures, as per the EBA Guidelines, the credit institutions will be obliged to collect and maintain accessible a minimum amount of information, as follows:
- a clear identification of the expositions or Borrowers, to whom the moratorium is offered;
- a clear identification of the expositions or Borrowers, to whom the moratorium applies;
- the amounts called-off, postponed or reduced due to the moratorium;
- every economic loss, resulting from the moratorium action on the individual expositions and the relevant depreciation cost.
The application of a general private moratorium on loan payments, according to the European Banking Authority Guidelines, should secure to the banks/financial institutions a preferential regulatory treatment of the overdues. For credits, eligible to the requirements for rescheduling, and to which the relevant measures were applied, the banks should not be required to allocate additional funds or maintain provisions. Regardless of this, the measures undertaken by the banking and the finance sector for introduction of relief mechanisms for servicing the regular expositions of Borrowers, affected by the imposed measures, related to the COVID-19 pandemic, as well as the rescheduling of due amounts on credit payments, should be applied upon adequate risk assessment and individual evaluation, for the purpose of securing a sustainable finance system. For the period of duration of the enacted moratorium, the credit institutions should evaluate the potential non-payment risk from Borrowers, included in the moratorium scope, in accordance with the policies and practices normally applicable for such credit assessment, including when such are based upon automatic checks of non-payment risk indicators.
When performing concrete checking procedures on particular individual Borrowers, such procedures should preferentially focus on Borrowers, assessed as most likely to be experiencing long-term payment difficulties or insolvency, resulting from the COVID-19 pandemic impact. It is important to assess whether the credit installment payment difficulties are temporary, and the likelihood of their transformation into long-term problems; in the latter case, the corresponding expositions should be classified in accordance with the current rules and regulations, as ‘in default’ or ‘forborne’, in consideration of which additional securing measures have been undertaken to protect the interests of the bank/the financial institution.
You can address questions on particular issues to Att. Tsvetelina Stoilova (email@example.com) – Senior Associated Partner and Head of Banking and Finance practice at Popov, Arnaudov and Partners Law Office