Why are banks against a personal bankruptcy law?

The lack of a bankruptcy code that would allow individuals in financial distress relief from some or all of his debt is a major problem. Even though the Council Regulation (EC) No. 1346/2000 on insolvency proceedings applies to all Member States, Romania has not yet introduced a similar legislation not even after three years since the accession of the country to European Union. But passing the law would face a bitter opposition from the bankers, Gheorghe Piperea told Wall-Street.

“The political class has constantly ignored the need of such a regulation and the only issue that could plague this project from day one would be the opposition from the bankers who cite unfavorable economic conditions to overhaul the bankruptcy code, amid rising delinquency rate and increase of NPL ratio in bank’s total lending. Bankers say the regulation that would “rescue” debtors would lead to an increase in non-performing loan ratio, as many bad debtors would stop repaying the loan and trying the rescue themselves by filing for bankruptcy proceedings”, said Piperea.

But this approach is wrong, Gheorghe Piperea saying it is “irritating” from the perspective of a EU citizen: if a bankruptcy regulation for individuals is in force in all EU Member States, then Romania should adopt it accordingly.

“Second of all, there is banks’ arrogance towards us, Romanians, who are perceived as scammers, considering that the country’s five largest banks gained nearly €8bln from retail loans since 2003”.

The sale of non-performing loans and account receivables by banks to collection agencies is a common practice. But when the debt buyers are owned by debt sellers, things get complicated.

However, most banks have a subsidiary specialized in receivable collection, mechanism that according to Gheorghe Piperea is a violation of the statutes of the banking law and civil law. Banks sell these account receivables, remove them from the balance sheet and avoid provisioning while keeping a good capital adequacy ratio.

“One of the largest banks in Romania has a subsidiary with a common capital of 5,000 lei that in July and August bought €45 million in troubled loans from the parent bank. It probably purchased these account receivables at 20% of their actual value, through a loan from the parent bank. Therefore, the bank’s capital adequacy ratio is only apparent, as the group is still in the same distressed situation”, said Gheorghe Piperea.

The subsidiary tries “to temporize someway or put off the inevitable of this non-performing loan portfolio, and to leave time to wait before initiating the foreclosure procedures against individual clients”, said Piperea.

If the subsidiary paid 20 lei for the non-performing loan and sold the borrower’s mortgaged house for 40 lei, the bank would still have a 100% profit.

“The central bank should intervene in these illegal practices and should impose sanctions or even revoke bank’s license to perform these operations. This way, banks create a false capital ratio and delude population and authorities”, he added.

Loan delinquencies climbed to €1.5bln in August this year, according to the monthly bulletin issued by the central bank. Arrears for loans 30 days past due reached €500 mln.