The market for non-performing loans (NPL) transactions in the EU is set to benefit from improved transparency, following recent legislative and regulatory initiatives. This is commented by the experts of agency Fitch Ratings. The initiatives, which cover NPL sales and risk-weightings, and the establishment of a central data repository for transactions, could increase price transparency and help the secondary NPL market attract more sellers and purchasers. It could also spur consolidation among purchases, as larger and more established players are likely to benefit the most.
A political agreement was reached in June 2021 between three institutions – the European Parliament, the Council of the EU and the European Commission (EC) on the proposed “Non-Performing Loans Directive”. The directive to allow non-regulated third parties to buy NPLs across the EU. Once implemented, it could facilitate NPL sales in countries where purchasers are constrained by the need to be licensed as a credit institution to hold loans on balance sheet or, to a lesser extent, to amend loan terms. This is the case in France (licence required to purchase loans) and Germany (licence required to restructure loans) – two of the largest markets with potential for the development of NPL sales. In Bulgaria NPL can be purchased only by the companies with minimum capital requirements and registration as a financial institution in Bulgarian National Bank.
The European Banking Authority (EBA) recently announced its new goals – transparent price and accessible data on NPL transactions. The market will benefit from the regulation, noted the experts of Fitch Ratings. The EC also intends to require debt purchasers to comply with more formal borrower protection rules. Purchasers will be required to appoint a credit servicer (a role they could fulfil themselves) to manage NPLs of individual customers, as well as SME loans if the buyer is not based in the EU.
The Fitch Rating says the largest debt purchasers are well equipped to cover the higher compliance costs and the proposed changes should not materially increase their exposure to customer welfare or conduct-related risks.