The challenge of returning 15 bln euros in cured debt to banks

Non-performing loans of 10 to 15 billion euros that are currently under the control of loan servicers can be cured quickly and returned to lenders as up-to-date debt from borrowers, mainly from households and small businesses, returning to normality as they recover their access to the banking system.

According to bank executives, out of the 60 billion euros of NPLs that have been securitized by banks and sold (or will be sold in the near future) to debt receivables companies, about 10 - 15 billion euros can become sustainable and up-to-date, through substantial restructuring, paving the way for their return to banks. Thus, about 200,000 borrowers who are now in the red and do not have access to the banking system will regain access. Banks that possess a lot of excess liquidity are actively seeking to increase lending, however, due to the prolonged crisis, many borrowers are not seen as being credit worthy.

Of the 60 billion of securitized NPLs, 15 billion euros are being restructured and are considered up-to-date, but they cannot return to normal, as they are considered to be unsustainable by banking criteria. As a result, thousands of borrowers, individuals and small businesses are being held hostage by a particular situation, as they cannot return to normal due to heavy debt levels and ineffective regulations.

For example, a mortgage loan of 80,000 euros with a house valued at 64,000 euros and 15 years to go on the debt, with an interest rate of 2.5%, is serviced at a regular installment of 470 euros and which after regulation, as determined through government intervention , is set at 235 euros. This loan, although serviced, is not considered viable for the banks and cannot be returned to the lender as the critical loan to value ratio is at 125% which is beyond what is considered to be credit criteria.

The servicers propose the substantial restructuring of the loan, in order to make it really sustainable:  30 percent haircut on the amount of the mortgage, while extending the duration of the loan to 20 years. Thus, the balance of the loan will be limited to 54,200 euros, while the new monthly installment will be set at 252 euros. The loan to value will be set at 85% which is within the credit criteria of banks, paving the way for the return of the loan to normality and the banking system.

This way, many thousands of households, which are currently in a vulnerable financial situation, but also the self-employed and small businesses that are currently outside the banking system will return to normality and will be fully integrated into the productive fabric of the country.

The benefits

Bank executives estimate that the repayment of cured debt reaching 15 billion euros would have a multiplier effect on the banking system, starting with the de-stigmatization of some 200,000 borrowers, who are now out of the banking system. The Greek state would be freed from a difficult political issue while at the same time the risk of forfeiture on state guarantees that have been given in the framework of the "Hercules" plan would be reduced. The benefits for the banks are also significant, as they will strengthen their balance sheets with new sound loans, boosting interest income.

The big obstacle

However, there is a major obstacle to the rapid repayment of cured loans to banks: the ECB's supervisory rules. Loans that are cured and return to banking normalcy, despite being up to date, are supervised as special cases, as they are classified as performing forborne, and for about two years, banks are required to write increased provisions, which makes them extremely problematic for lenders. Having suffered heavy losses from clearing their balance sheets, they are not prepared to repurchase these loans which will lead to increased provisions.

The increased forecasts act as a disincentive for banks, forcing the loss of the above benefits. A number of alternatives to sidestep supervisory rules have been considered, such as the implementation of a specialized program through the Development Bank, which, however, presents significant technical difficulties.

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