Challenges for the banking system in Romania
Thursday 27 May 2021
Carmen Peli
Peli Partners, Bucharest
carmen.peli@pelipartners.com
Delia Lepadatu
Peli Partners, Bucharest
delia.lepadatu@pelipartners.com
Challenges for the banking system
The past decade has seen the Romanian banking sector face a series of challenges testing their resilience. The banks were forced to continuously adapt their business strategy and portfolio of products in order to maintain adequate profitability. On top of that, the Covid-19 pandemic has brought additional strain that will likely have consequences over the following years.
While this article does not aim to be an exhaustive analysis of the legal challenges faced by banks in Romania, some of the primary issues that we shall see at play in the coming years could be related to the following factors:
Despite the many difficulties, banks must strive to remain a strong pillar in Romania’s economy.
Loan moratoria in the context of the Covid-19 pandemic
When the Covid-19 outbreak began, many banks rapidly implemented payment suspension schemes for their customers under the supervision and coordination of the National Bank of Romania and the European Banking Authority. Moratoria implemented on such a large scale within a limited period of time were unprecedented in Romania before the health crisis.
The main focus point was on governmental emergency ordinance no 37, dated 30 March 2020 (GEO 37/2020), which introduced a payment suspension of up to nine months. This was later amended in January 2021 by the Romanian government to extend the deadline to submit a payment suspension until 31 March 2021.
According to recent data,[1] over 686,500 payment suspension requests have been submitted in 2020, approximately 67 per cent based on private moratoria implemented by the banks, while the remaining 33 per cent were granted based on GEO 37/2020. Moreover, a significant number of payment suspensions were granted in 2021, as a result of the submission deadline being extended under GEO 37/2020.
While the payment moratoria were a welcome relief during the early stages of the pandemic, the sector continues to be cautious as the effects may reverberate in the future. One of the main concerns is the correlated increase of non-performing loans rates once the grace period expires. The deferral of payment in the context of the Covid-19 pandemic does not automatically lead to a reclassification of loans, but the credit institutions must ensure that credit risk is permanently assessed and identified, including by reference to default coefficients.
Pro-consumer legislation
The legislative scene has been invaded over the last years with pro-consumer laws and proposals aimed at protecting the interest of clients while generally disregarding the potential adverse effects that banks might encounter.
The most recent legislative proposals presented below are being closely monitored. One of them, namely the draft law addressing consumer protection against excessive interest, managed to pass Parliament, but was later declared by the Constitutional Court to be unconstitutional before it had entered into force.
Draft law for consumer protection against currency risk in credit agreements
The proposed law is aimed at protecting consumers against currency risks that may result in relation to their agreements with banks, non-banking financial institutions and debt recovery companies. If the law is adopted, foreign currency denominated loans would be converted, upon the request of the consumer, into national currency determined based on the exchange rate applicable at the date when the loan agreement was concluded, plus a maximum variation of 20 per cent.
Financial institutions would be prevented from including in credit agreements provisions which transfer the currency risk to the consumer and are obliged to accept the conversion of the credit facilities into another currency upon the consumers’ request. Should the banks not accept or fail to respond to the consumer’s request, the latter will be able to address the courts with a request to adapt the credit agreement.
The proposed law would also apply to ongoing and assigned credit agreements.
Draft law for consumer protection against speculative debt assignments
The proposed law is aimed at protecting consumers by implementing a threshold for the amount to be recovered by a debt recovery company, limited to the actual price paid to the bank in order to acquire the claim.
The following would be presumed to be speculative assignments if:
- a non-performing loan portfolio is transferred by a bank to a company affiliated to it, which shall also be mandated to manage and recover the assigned debts;
- the assignment of claims was performed in order to artificially increase the bank’s solvability indicator; or
- the assignment of claims was performed in order to decrease bank’s tax base.
The proposed law would also apply to ongoing credit agreements.
Draft law for consumer protection against abusive enforcement proceedings
The proposed law is aimed at protecting consumers against professionals who benefit from agreements recognised as writs of execution under Romanian law, including banks, non-banking financial institutions, leasing companies, debt recovery companies etc.
In relation to consumers, the following will no longer be recognised as writs of execution:
- promissory notes;
- documents authenticated by Romanian public notaries;
- leasing agreements;
- credit agreements; and
- lease and loan agreements.
When analysing the requests to initiate enforcement procedures against consumers, the courts must subpoena the debtor and analyse, either automatically or following a request, the abusive nature of the agreement being enforced. If adopted, this law would hugely impact the enforcement of loans, lease and security agreements and would significantly extend the duration of recovery proceedings.
The proposed law would apply to ongoing enforcement procedures, as well as those initiated after it enters into force.
Increased limitations imposed in relation to NPL transfers
During the past year, the non-performing credit rates have maintained a steady level within the recommended guidelines. For some banks, this might change following the expiry of the moratorium period.
The current fiscal legislation no longer encourages NPL transfers following a legislative amendment passed in 2018 which imposed limitations on such transactions. This blocked the secondary credit market by applying a cap of 30 per cent in terms of deductibility of losses arising from NPL disposals.
Amendments are required in the fiscal field in order to eliminate the deductibility cap, thus permitting the banking system to cope with increasing default rates in the context of the pandemic. This is even more relevant considering that financial institutions are constantly required by central banks to lower the non-performing credit rates affecting their portfolio, to increase the quality of their assets and comply with national and European legislation.
A glimpse of hope
The SME Invest program was intended as a state support scheme aimed at an increase in lending to overcome the financial impact of the pandemic. State aid schemes have been diversified and seek to provide support to borrowers, ease the burden of banks and encourage lending. The state support programme unfolds slowly and some of the worst affected companies will likely not be able to benefit from it.
Luckily, the Covid-19 pandemic hit at a time when banks were at their strongest following the divestment of major NPL portfolios. However, the effects of the pandemic will require continued vigilance and prudence including with regard to capital requirements and management of possible liquidity issues.