Banks: The big clearing for defaulters

By Leonidas Stergiou

The decision had been made for some time, but the message to the recipients was given in a clear and coordinated way last week. At the general meeting of the loan management companies (servicers), both their president, Mr. Tassos Panousis, and the Governor of the Bank of Greece, Mr. Giannis Stournaras, were clear. No facilities for strategic investors, refinancing only of sustainable loans and more efficient management of the pledge.

The concept of strategic default is not recently discovered. But today there is room, but at the same time the pressure and the tools to reduce the phenomenon. The big change came with the new bankruptcy, but mainly from the decision of banks and management companies for the next step, after the reduction of red loans, under the pressure of the supervisory authorities.

Auctions

The first weapon used is that of auctions. Of the 3,600 auctions held through the end of September, none concerned a vulnerable or coronary borrower. Not even the 8,500 auctions scheduled for the fourth quarter. And the number for 2022 has been set at 40,000 auctions.

Electronic intersections

Another weapon is the digital transformation into banks and the state. Today the systems of the banks cooperate with those of the tax office, the Funds, the police, etc., making the extraction of data and the intersections easier. In addition, due to acquisitions and mergers over the past decade, there have been communication and data processing malfunctions. During the mergers and analysis of data, many cases were found where the borrower paid in the old bank, but stopped after its acquisition by another. This was also identified by an investigation by the Bank of Greece, mainly in cases of acquisition of problem banks by the systemic ones. The survey found a 5.5% higher chance of converting a serviced loan into “strategic red”.

Customer evaluation

Banks are conducting new customer ratings, with the aim of better assessing their risks and identifying viable cases for new financing. This is where strategic defaulters and “zombie” companies are located, ie loss-making and over-indebted companies. The studies examine the clientele by industry and by geographical area, taking into account the total sizes of each sector of economic activity and the local and national economy.

Bank of Greece and ECB

The ECB and the SSM, as well as the Bank of Greece, are pushing for financing and consolidation of sustainable businesses and loans, with more efficient pledge management, so that they can be reintegrated into the production process. At the same time, the Bank of Greece is also conducting its own analyzes in order to determine the perimeter of the strategic investors. A first study showed that one-sixth, or about 17% of all red loans, with elements of the previous crisis, come from strategic defaulters. A more recent study published this year estimates strategic defaulters in the tourism industry between 35% and 42%. This result was reached after comparing the financial figures of the tourism industry, in relation to the financial results of companies and the percentage of red loans. While everyone agrees that most of the red loans came from the ten-year crisis, the BoG noted that foreign-dependent tourism revenues were not particularly affected in the short term, and then increased (tourist revenues, occupancy, overnight stays, etc.). ). But red loan rates were high.

Management companies

Today the largest volume of red loans has passed to servicers and this will be strengthened in the coming months with the completion of the remaining securitizations. Based on the agreements for the sale of these loans to the funds and the law of Hercules, the management companies are affected if they keep strategic defaulters alive. Instead, they benefit twice as much (as banks) when consolidating sustainable loans. The disincentive is linked to the commission received by the management company depending on the recoveries. If these are less than the target in the agreement, the fund withholds the commission. The second element is related to the state guarantee given by the State for 100% of the value of the senior part of the securitization. The guarantee is given only when the servicer has managed to recover 50% plus 1 euro of the senior.

Young bankrupt

The electronic platform of the Special Secretariat for Private Debt Management gives access to the collection of data from banks, Funds, etc. She is also responsible for certifying that someone is vulnerable. Also, only through the platform can an application for out-of-court settlement be made, with protection from auctions.

The data is impressive: Out of the approximately 3,000 applications for a vulnerable debtor certificate, until the beginning of the month, only 17 certificates had been issued, while out of the 39,000 applications for an out-of-court settlement under the new bankruptcy, only 600 debtors finalized and proceeded for settlement or liquidation and bankruptcy. The remaining applications are either pending, with the aim of collecting more debt for debtors, waiting for taxes and levies until the end of the year, or they do not press the button to remove banking and tax secrecy. At the same time, the trial of about 40,000 applications for protection by N. Katselis is extended.

There are other statistics. Of the 6,000 auctions scheduled for September, about 3,600 took place, with most either canceled due to lack of interest or debtors rushing to pay or settle at the last minute, according to executives.

Banks

One of the factors that contributed to the existence of strategic defaulters was the reluctance of banks to write off losses from a non-performing loan. Thus, they refinanced with the expectation that conditions would improve and become sustainable. Also a deterrent was the bureaucracy and the long time required for bankruptcy and liquidation of property. Today this has changed with the new bankruptcy law.

Banks have greatly reduced their red loans through securitizations, shifting the management problem and costs from now on to management companies. Their balance sheets now allow them to take on greater risk and losses for new financing and to freeze unsustainable refinancing. At the same time, there is pressure for profits and increase in funding shares due to the upcoming growth. Maintaining bad payers or “zombies” is a weight in achieving their goal. Therefore, they prefer to include in their balance sheets new serviced loans that will bring them profits, rather than forcibly keeping loans and businesses alive. Moreover, the recording of losses was more difficult than the banking transformation (hive down) they carried out in 2021 and the new law on deferred taxation, which no longer threatens banks with an immediate conversion into a final requirement of the State, as was done at Attica Bank.

Finally, the banks report that the multi-year crisis and then the pandemic have cleared the landscape. It was one of the most difficult stress tests, highlighting all aspects of borrowers. However, they insist that the vast majority of red loans and arrears came from income and work shocks due to the crisis.