Carmen Peli
Peli Partners, Bucharest
carmen.peli@pelipartners.com

Delia Lepădatu
Peli Partners, Bucharest
delia.lepadatu@pelipartners.com

Introduction

Inflation has hit the loan market in Romania and borrowers are the ones being impacted by the recent financial changes. One of the biggest concerns is the fact that interest rates have increased significantly over the past six months, irrespective of the type of loans, and there is no hope of seeing a significant decrease in the upcoming period.

The main indicators, based on which interest rates are determined in Romania are the the Romanian Interbank Offer Rate (ROBOR) and the indicele de referință pentru creditele acordate consumatorilor (IRCC), which were newly introduced in 2019 as being more stable benchmarks, while EUR loans have become less popular in recent years among banks and customers. However, both indicators for RON loans have seen a steep increase, mainly because the National Bank of Romania has increased its key interest to combat inflation. ROBOR has taken the lead, with IRCC coming in close behind it.

To cope with the high inflation and interest rates, the Romanian government issued Governmental Emergency Ordinance No 90/2022 for the purpose of granting certain facilities in relation to the loans granted by banks and non-banking financial institutions to certain categories of debtors (GEO 90/2022), introducing a new payment suspension mechanism for credit instalments for a period of up to nine months.

The Romanian government has stated that this measure is aimed at providing relief to distressed debtors in the context of the current financial crisis, which has been exacerbated by the increased inflation and interest rates, the war in Ukraine and the crisis in the energy market.

ROBOR versus IRCC: the lesser evil

To understand the phenomenon, we must first understand how ROBOR and IRCC are calculated.

ROBOR is calculated as the arithmetic average of the interest rates quoted by the ten largest banks in Romania participating in the ROBOR calculation process, at which they are willing to offer to place deposits with the other participants.

IRCC is determined as an index calculated as the weighted average between interest rates for deposits and the volume of transactions on the money market (interbanking transactions).

When IRCC was first introduced back in 2019, it was considered to be a more stable and accurate index as it was calculated based on actual indicators used in transactions carried out within a certain timeframe. On the other hand, ROBOR was considered as being slightly determined on a 'whim', based on indicators highly influenced by short-term market disturbances.

IRCC is applicable only to loans granted to consumers after 2019, when it was introduced, while ROBOR continues to apply to companies or loans granted to consumers before IRCC became available. Moreover, IRCC is calculated based on indicators for the previous three months and as such is considerably delayed as compared to ROBOR. This makes it more appealing as the rates are currently lower, but it is expected that they will eventually catch-up with the market and ROBOR within the following months and years.

Because ROBOR has increased at a higher pace, numerous consumers have flooded the banks with requests to amend their loan agreements in order to switch to IRCC interest rates and secure lower instalments.

While the procedure is rather simple and involves only the signing of an addendum to the loan agreement, the change is irreversible, and consumers will not be able to return to ROBOR if it stabilises and becomes lower than IRCC in the future. Moreover, banks have repeatedly warned consumers that switching to IRCC is only a temporary solution, which will more likely prove useless when IRCC reaches the same levels as ROBOR.

As for companies, IRCC is not an option for them, and the higher interest rates are affecting their profits. Therefore, the only solution is to continue to cope with ROBOR until it eventually decreases, or alternatively to refinance their RON loans with EUR equivalents, in order to benefit from the low Euro Interbank Offered Rate (EURIBOR) rates for as long as they remain below ROBOR.

Obviously, refinancing with EUR loans comes with its own risks, namely potential increases in exchange rates. However, the RON/EUR exchange rate has been stable during these troubled times and the National Bank of Romania has declared that maintaining the stability of these exchange rates is its main goal for the upcoming period.

The new moratorium: a temporary relief

GEO 90/2022 was applicable to individuals, freelancers and companies, whose income was directly or indirectly affected by the current financial crisis. The payment suspension was available, upon request, until the end of August 2022 and applied to all types of loans granted by banks and non-banking financial institutions before 30 April 2022, as well as leasing agreements, except for: (1) revolving facilities, including credit cards; (2) overdrafts; and (3) credit lines.

All amounts owed to lenders based on credit agreements were suspended (ie, principal, interest and other costs) and the contractual period was automatically extended by the duration of the suspension period.

The interest associated with the loan continues to be calculated by the bank during the suspension, but is capitalised and included in the principal amount to be repaid by the borrower after the suspension ends.

Because the interest continued to accumulate, the payment moratorium was not considered to be a wise choice during these times as it did not protect debtors from the steep rise  in interest rates.

Moreover, one may argue that suspending payments for a loan for up to nine months will only increase the repayment burden of a debtor once the moratorium ends as the effects of the current financial crisis are expected to extend beyond the duration of the payment suspension.

Therefore, payment suspension is seen as a temporary solution, which may help in cases in which there is low cash flow for example, but in the long-term it only serves to increase the loan amount with interest calculated at record highs and may prove to be only a delay to an impending default situation.