NPL solutions in Hungary – regulatory overview
December 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
Non-performing loans (NPL) are on the rise in both the retail and commercial sectors in Hungary. Hungarian banks have struggled for the past few years, and the effect of the crisis on the NPL rates was exaggerated by the fact that FX-denominated loans (i.e., loan or leasing contracts that administer the debt in foreign currency but the actual drawdown and repayment are made in forints) became very popular during the pre-crisis area. When the exchange rates of CHF, EUR and JPY launched skyward after the crisis hit the Hungarian economy, such FX-denominated loans became extremely hard to service for Hungarian families and SMEs.
Past efforts going the wrong way
The Hungarian government launched different programmes that aimed at the extinction of FX-denominated loans. The mandatory prepayment programme, launched in 2011, provided an opportunity to debtors to entirely prepay FX-denominated housing loans in HUF at a preferential exchange rate if the exchange rate at disbursement was lower than the preferential rate. Banks were obliged to accept such prepayment. Another programme running in 2012 aimed to fix the exchange rates for a certain period, thus eliminating the fluctuation risk. The difference between the actual repayments (calculated on the fixed preferential rate) and the instalments calculated on the actual exchange rate was credited against a collection account in HUF. However, NPLs were excluded from the scope of both programmes, resulting in an increasing overall NPL rate in Hungary.
Further past efforts
Settlement over unfair terms. When the exchange rates went wrong for the debtors of FX-denominated loans, such debtors have initiated numerous lawsuits claiming that the entire loan agreement (or several provisions thereof) are null and void. The Hungarian Supreme Court, noticing that lower level courts are in dire need of a guideline, has issued a ruling (binding on lower level courts) that renders the application of the buying rate to the drawdown and the selling rate to the repayment null and void, and sets forth criteria under which the unilateral amendment applied by the banks regarding fees and interest rates may be permitted. The Hungarian Parliament, in an effort of avoid the court system being overloaded by the lawsuits of the debtors anticipated as a consequence of the ruling, adopted an act incorporating the main points of the ruling.
Under the act, the mid-market rate published by the Hungarian National Bank applies to both the drawdown and the repayment and all past unilateral amendments were presumed unfair and thus null and void. The presumption could be contested by the bank at court, but none of that was successful. The overpayment of the debtors, either due to the spread or the unilateral amendment, must be set off against the capital of their debts. In the case of ongoing contracts, the settlement was made by set off. This resulted in the immediate decrease of the NPL rates (as the settlement annihilated the overdue debts); however, this one time effect wore off swiftly (the debtors were still unable to service the loans, so NPL rates started to rise again).
Asset management company. The Hungarian Parliament established a state-owned entity that aims to purchase the real properties of the debtors of certain NPLs (a certain list of criteria must be met). The transaction can be initiated only by the debtor and the banks must comply with its terms. The purchase price is heavily discounted and the basis thereof is the market value of the real property. The purchase price is directly paid to the bank by the asset management company and is set off against the debts of the debtor. After the transaction, the asset management company leases the real property to the debtor.
Recent legislative efforts
Mandatory conversion. Elimination of the fluctuation risk was the main goal of the mandatory conversion of the FX-denominated loans. The conversion has been conducted in several steps (starting with the housing loans and most recently ending with vehicle and commercial loans) and at the end such loans would disappear from the retail sector. The conversion must be made at a prefixed close-to-market rate. With the elimination of the fluctuation risk it is expected that Hungarian private individuals will be in a better position to service their loans in the long run, and that the NPL rate will start to decrease as well.
Transfer of loan portfolio. The purchase of loan receivables is considered as lending activity in Hungary, and thus prospective buyers are expected to have a valid Hungarian banking licence (or a licence issued by a European Economic Area member state passported into Hungary). The licensing requirement, as the main impediment to the sale of NPLs, was reinforced by the discouraging volatility of Hungarian legislation, the lack of effective enforcement measures and the lack of an effective market. The eventual enactment of the new Hungarian Civil Code (in force as of 15 March 2014) deepened the problem, as it renders the security interest terminated where contractual positions are transferred, even if the security provider has agreed to the transfer (however, in case of the agreement of the security provider, the terminated security interest comes to life again on the same rank).
Thus, the Hungarian Parliament has amended the Hungarian Banking Act (in force as of 7 July 2015) which now provides for the regulation of loan portfolio transfers. Under the new regulation, such transfers must be authorised directly by the Hungarian National Bank, bypassing the need for the agreement of either the borrower or the security provider. However, it does not provide for an easement on the banking licence requirement.
Bankruptcy for individuals. The most recent legislative effort was the adoption of a new legal regime (in force as of 1 September 2015) setting out debt settlement procedures for private individuals. The new measure is mainly aimed at non-performing housing loans and is expected to result in the decrease of NPL rates.
The debtor may initiate the debt settlement procedure under a long and complicated list of conditions. So far, the conditions have proven so strict and the initiation of the procedure so administrative that only very few debtors have tried to initiate the procedure. This resulted in a revision of the regime (targeting the conditions and the initiation procedure) which is still ongoing.
The debt settlement procedure may take place both outside and within the scope of a court procedure. The out of court procedure is coordinated by the bank and aims to reach a debt settlement arrangement to which each and every creditor must agree. For the court procedure, the debtor must apply for debt settlement at the Family Bankruptcy Service (FBS). The FBS will appoint a family administrator who will be in charge of the procedure and will have certain powers over the assets of the debtor. The family administrator prepares the debt settlement arrangement (together with the debtor), over which the creditors decide by voting and it is binding on all creditors. If no agreement is reached, the family administrator will start to prepare the ‘debt settlement plan’, which aims at the liquidation of certain assets of the debtor and distribution of the proceeds among the creditors.
The Hungarian National Bank announced during the summer of 2014 that it wishes to create a ‘bad bank’ that would purchase only corporate NPLs from the banks at a discount rate. The funding of the bad bank has remained unclear. It is expected that it will be state owned, either directly or indirectly. There were estimates that even 400 billion forints may be required for such purchases, depending on the scope of its operation and the discount rate; however, recently the idea seems to have been abandoned.
Gergely Szalóki is an attorney at law at Schoenherr. He can be contacted on +36 1 8700 690 or by email: email@example.com.
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