The Council of Europe adopted a new framework for bank overdue loans a few days ago. The new rules set capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets. The aim of the reform is to ensure that banks set aside sufficient own resources when new loans become non-performing and to create appropriate incentives to avoid the accumulation of NPLs.

This will also have a consequence for the claim management companies. Banks will have a new incentive not to hold non-performing loans in their portfolios. In the last 2-3 years active sales of bad loans from banks to specialized companies are active in Bulgaria and also in other Balkan countries. Loans are collected according to certain criteria in a common portfolio that is then sold. In this way, banks do not “close” money for capital requirements and clear their balance sheets, focusing on their core business.

A bank loan is generally considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying the agreed instalments or interest or when it becomes unlikely that the borrower will reimburse it. When customers do not meet their agreed repayment arrangements, the bank must set aside more capital on the assumption that the loan will not be paid back. This increases the bank’s resilience to adverse shocks by facilitating private risk-sharing, while at the same time reducing the need for public intervention.

“The new rules should serve as the same approach, motivating enough in each country to clean up banks quickly or at least gradually,” said Petar Andronov, chairman of the Association of Banks in Bulgaria, in an interview on Investor.bg. He explained that the capital of banks, which have very bad loans and failed to clean them up quickly, will be sanctioned in proportion to these non-performing loans. Banks will have the opportunity to clear their portfolios, and when the regulation reaches the maximum level, they will not have any problems, Andronov said. Conversely – if they postpone the clearing, it will feel painful, the banker says.

According to EU, addressing possible future NPLs is essential to strengthen the banking union. It preserves financial stability and encourages lending to create growth and jobs within the Union.

On the basis of a common definition of non-performing loans, the proposed new rules introduce a “prudential backstop”, i.e. common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing. Different coverage requirements will apply depending on the classifications of the NPLs as “unsecured” or “secured” and whether the collateral is movable or immovable.

Minimum coverage level (in %)

After year	1	2	3	4	5	6	7	8	9
Secured by immovable collateral	0%	0%	25%	35%	55%	70%	80%	85%	100%
Secured by movable collateral	0%	0%	25%	35%	55%	80%	100%
Unsecured	0%	35%	100%

Source: consilium.europa.eu

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