Bank loans and renegotiation conditions after lifting the state of emergency

Murgova & Partners Attorneys at Law | View firm profile

As part of the measures taken to cope with the adverse economic consequences of the state of emergency, introduced by the National Assembly on March 13, 2020, the Association of Banks in Bulgaria came up with a specific proposal for the introduction of the so-called “Private moratorium” on credit payments. The set out rules are intended to mitigate the effect of short-term liquidity constraints on clients (individuals and legal entities), while allowing banks to be more flexible in re-arranging contractual relationships under credit agreements without negatively affecting their credit policy and their financial performance.

The rules laid down in the Banking sector’s proposal are in accordance with the European Banking Authority’s (EBA) regarding legislative and private moratoriums on credit payments related to COVID-19 (EBA / GL / 2020/02), adopted by the Governing Council of BNB’s Decision on 03.04.2020. Their final text was submitted for coordination and approval to the Bulgarian National Bank (“BNB”) during last week, as a result of which, on 10.04.2020, The Procedure for Deferral and Settlement of Accounts Payable to Banks and Their Subsidiaries – Financial Institutions in connection to the State of Emergency, adopted by the National Assembly on 13 March 2020 (full text of the document is available on the BNB website), was approved by a decision of the BNB Governing Council.

Which institutions apply the established rules?

It is envisaged that the rules apply to both – banks and financial institutions that are subsidiaries of banks (e.g., financial leasing companies, companies acquiring credit claims, etc.).

It is a responsibility of each bank (or financial institution) to present in an accessible manner to its clients the specific terms and conditions of the procedure. We would also like to note that from the moment of approval of the rules, the institutions that declared their desire to apply them started spreading out the specific terms to their clients by putting informative materials in their offices, announcements on their websites and so on.

Who can take advantage of the opportunities provided?

All borrowers have the right to take advantage of the opportunities provided (individuals and legal entities, with the exception of credit institutions) who:

– have or expect difficulties when repaying their obligations under the terms of a credit agreement concluded before 31.03.2020 (the difficulties should be related specifically to the COVID-19 pandemic, the restrictions introduced by the Act on measures and actions during the State of Emergency, announced by a decision of the National Assembly of 13.03.2020, as well as their consequences), and

– as of 01.03.2020, they had been repaying  the loan installments on a regular and timely basis (the rules also apply to clients who have defaulted on payments up to 90 days).

For what period is deferral of debt allowed?

The approved rules provide for the possibility for deferral of obligations for a maximum period of 6 months, ending not later than 31.12.2020 (the end date of the period will depend on the moment when the client has made his request to the servicing institution for the use of one of the mechanisms envisaged, as well as whether there are any overdue monthly installments at that time).

It is also envisaged that the client may refuse to apply the reliefs before the expiry of the general 6-month period. In that case, a new repayment plan should be drawn up to settle the conditions relating to the outstanding credit installments.

Which obligations are provided to be able to be deferred?

The rules provide for two main options, or so-called. “Rescheduling mechanisms”, namely:

– rescheduling of principal and interest

– rescheduling of principal only

In all cases, of rescheduling both may be a subject – the installments that have become due prior to the filing of the claim and the installments that have not yet become due.

It is important to keep in mind that the change adopted by the measures is only regarding the period of payment of the debt. In case during the negotiation process, the borrower and the lending institution make other changes to their original arrangements (e.g., change the amount of interest due), those changes will be treated as usual (in the case of a change in the interest rate – as a restructuring).

After the expiry of the postponement period, the outstanding balance of the debt is due under a new repayment schedule (its duration may be up to a maximum of 6 months longer than the original one between the parties). In case the client has opted for rescheduling of principal and interest, the new repayment plan also provides for the way of the payment of interest during the deferral period.

In addition, a third mechanism is foreseen, applicable to the so-called “Revolving products”.

In what time the application of the Order for postponement may be requested?

The rules provide a deadline for submission of applications by clients – until 22.06.2020. The final decision of the bank (or the financial institution) on the applicable rescheduling mechanism should be taken by 30.06.2020.

In what order does the procedure proceed?

The procedure starts with a special request from the client addressed to the servicing bank (or financial institution), submitted in one of the ways provided by the relevant institution (including online). Before initiating the procedure, we recommend that clients get familiar with the individual conditions laid down in the announcements of the institution concerned to verify that all the necessary prerequisites are met.

It is important to keep in mind that the choice of a rescheduling mechanism is made not by a unilateral decision (at the client’s discretion) but by mutual agreement between the parties. In case the client does not meet any of the obligatory conditions, it is possible to negotiate other individual terms for postponement, rescheduling or otherwise easing the borrower’s obligations during the period of the state of emergency. In the last case, however, the lending institution will not be able to take advantage of the introduced rule that rescheduling/relief does not lead to a reclassification of exposures in the form of restructuring or default. This circumstance should not be neglected as it would lead to a decrease in the flexibility of the lending institution as well as to the possible reliefs it is inclined to provide.

At present, the business and experts assessment on the “private moratorium” is positive. The advantage is that the measures introduced in Bulgaria cover a significantly large group of entities (all decent borrowers affected by the pandemic in need of temporary support), paying particular attention to the fact that the measures can be beneficial including to borrowers who have no insurance on their liabilities.

More from Murgova & Partners Attorneys at Law