New codes of conduct for restructuring loans
By George Mountis
How can loans be restructured?
When banks restructure a loan, such restructuring is usually accompanied by an increase in the interest rate. In banking terms, this is known as ‘re-pricing’ and often involves an increase of the interest rate by between 1.0 per cent and 3.0 per cent, depending on the level and basis of the existing rate on the loan. As a result of these restructurings, households and businesses are unable to repay their loan installments which already bear high interest rates – the highest in the EU.
In a step to prevent banking institutions from doing so, the Central Bank of Cyprus (CBC) has highlighted the new rules of conduct between banks and borrowers for handling loan restructurings.
From September 9, 2013, credit institutions should follow the provisions of the new Directive for ‘Managing Delinquencies’ and relevant ‘Code of Conduct’. Specifically, paragraph 7 of the Code of Conduct for the handling borrowers who are experiencing financial difficulties clearly states that credit institutions should make every reasonable effort to work with the borrower throughout the loan evaluation process to determine exactly repayment ability, and therefore, lead to a satisfactory and sustainable solution which is acceptable to both parties. It is recommended that most individuals currently negotiating a loan (of any type and currency) with any credit institution seek professional advice. There are structures that borrowers can adopt to restructure their loans, ring-fencing their current financial position and minimising loan costs and fees.
To this end, article 13 (2) of the Directive for Managing Delinquencies states that credit institutions must implement a fair and sustainable pricing policy for restructuring loans. This policy should aim to minimise costs, fees and interest rates for borrowers subject to each loan restructuring. Importantly, the emphasis must be given on the repayment ability of principal/capital.
Additionally, in accordance with paragraph 7 of the directive, credit institutions should refer borrowers to the new Dispute Resolution Committee (running since September 30, 2013) in instances where there are disputes and cannot be resolved. Again, we strongly urge borrowers to seek professional advice.
What happens if banks don’t comply with the new regulations?
In a recent press release, the CBC warns that banks will be fined heavily if they do not comply with the new directives. In the event that the Central Bank considers that any institution contravenes or fails to comply with the new directive or circulars from the Central Bank, the Central Bank governor has power to impose for each violation an administrative fine of between €1,000 and €500,000, depending on the seriousness of the offence.
If the infringement continues, the governor has the additional authority to impose administrative fines, depending on the severity of the violation, of between €100 and €50,000 for each day the violation continues.
We believe that this is the time to make radical changes. Such directives much be enforced and the Central bank, acting as the supervisory authority, should place strong emphasis on this mechanism to control and oversee local financial institutions.
All these guidelines are necessary and must be implemented in order for Cyprus to regain credibility as a regional financial hub, creating banks with solid foundations that can serve the real economy of the country.
Compiled by Dr George Mountis, managing partner of the Nicosia-based The Parthenon Partners. Send your query to [email protected]