With restructuring activity one of the significant issues for lenders in Romania, the local banking sector is awaiting the recovery of lending to breathe fresh life into the market. The demand for credit still exists and will continue to do so, and the economic turmoil is nothing more than a challenging period, say specialists.
The current crisis has forced many Romanians to curtail their personal spending as much as possible and use their liquidities firstly to pay back their debts.
However, job losses and slashed salaries mean many borrowers are still struggling to pay off their loans. As many lenders granted large sums to their customers in recent years, they now need to recover their money.
Although each lender has constituted provisions, many banks have decided to restructure loans for hard hit borrowers.
But to what extent have lenders on the Romanian market really restructured credit? And will it continue?
The answer depends on what is understood by restructuring. Banks have been willing to grant waivers or make changes to the terms of their agreements with larger clients since the onset of the crisis, at the end of 2008.
“However, real restructuring, the way it is done in the US or Western Europe, as a fundamental reassessment of the position of the debtor and lenders, has not really happened,” says Alexandru Birsan, partner with PeliFilip.
In his opinion, restructuring is a complex process which typically has better results for all parties than insolvency or enforcement of security.
But it also involves resources and a level of sophistication of the parties which has sometimes been missing.
“Serious restructuring requires a complex analysis process and a lot of work for the banks – they often do not have the resources to do this for many clients at once or the process may be too expensive for the size of the credit involved,” says Birsan.
He adds that often the lenders will simply end up enforcing their security (which normally extracts less value than a successful restructuring process) and many debtors will react by seeking the protection of the insolvency procedure, without a clear plan as to how to exit this procedure and with a very real chance that their business will be liquidated and the shareholders left with nothing.
According to Laszlo Diosi, CEO of OTP Bank Romania, the lender started its debt protection program in April last year and around 2,500 files on the private individual client segment have been restructured so far.
“In our experience, 60 percent of them recover and come back to normal,” says Diosi.
He adds that customers who use the debt protection program are those who have real difficulties in repaying their loans: they cannot pay back the loan by the initial due date and cannot or do not want to extend that date; they cannot afford the present monthly rates or/and interest rates; they need a grace
period until the likely time they are able to resume the normal repayments.
“Our solutions in these cases can be multiple: extending the final loan due date beyond the standard maturity period, granting a grace period, decreasing the monthly rates for a specific period of time or setting irregular monthly rates, changing the loan currency or adding a additional co-debtor,” says Diosi.
As for OTP, the CEO says that its restructuring is at more or less the same level at the moment. “There are no more new restructured files than those which are coming out of the restructuring period,” he adds.
In his opinion, the SME sector is the worst exposed to the current turmoil and so many smaller firms have needed to restructure their loans.
“The rate of over 90 days past due loans/gross customer was 3.4 percent last year, according to the Budapest Stock Exchange 2009 Report,” says Diosi.
Elsewhere, representatives of UniCredit Tiriac Bank say the lender has restructured last year about 3,000 individual loans and also a series of credits offered both to SMEs and companies.
“We still pay attention to the process of restructuring of exposures, both as part of a larger process of preventing some
potential problems and for a partnership with our customers, in order to identify the best solutions for them,” say UniCredit representatives.
The loan restructuring process aims to reduce the monthly burden through the extension of credit payments, offering a grace period for principal, interest and commission, according to the financial situation of each customer, and restructuring of the revolving credit facilities for loans with monthly repayments. “The restructuring process is a tool that the lender will use in order to consolidate its relationship with its customers in the current economic context, as a solid long-term business is based on the maintenance of a solid customer portfolio,” they say.
As for the future of restructuring credit activity on the local market, Birsan thinks that we will see more of it.
“Unfortunately the economic recovery is very weak. A lot of the initial, simple steps of accepting deferrals of payment and extending deadlines were based on the assumption that the recession would be shorter and the recovery stronger. This means that a lot of the issues that have been delayed may resurface soon as some of the initial assumptions prove unfounded,” says the partner.
He adds: “We have already seen an increase in large insolvencies of late. Some of these difficult situations can be prevented by restructuring and I think that will probably start happening, at least with the larger credits.”
Since the beginning of the crisis, lenders, customers and specialists have been awaiting a recovery in lending activity, with the oft predicted green shoots repeatedly failing to emerge.
The uncertainty of the economic conditions was the main reason for the delay.
“In terms of retail borrowing, I think the demand is there and will continue to be there – people want houses, cars and holidays and this does not materially change just because there was a bad year or even two. Romanians have already become accustomed to credit as a way of reaching their goals faster (even if they have to pay more for it in the long term) and this will not go away, it is just human nature and it is what happened in all advanced economies,” says Birsan.
Furthermore, the demand for business lending is also there – almost every company wants more resources in order to do more, to compete more effectively on the market.
“The issue is the availability and the price of borrowing. At the moment, banks are being a lot more careful about lending and are demanding higher interest rates. However, a bank’s business is lending – they have to lend in order to be profitable and competitive in the market. I think a pick-up in lending is inevitable. The timing of it actually depends on restructuring – as the banks resolve more bad debts, their appetite for risk will come back. At the moment, they simply have very little room for deals that could, potentially, go wrong,” concludes Birsan.