‘Loan Repayment Holidays’ & Restructuring Possibilities from the National Bank of Ukraine: A first step in relaxing the burden for businesses and banks during the COVID-19 crisis
In today’s circumstances, when the spread of coronavirus has literally paralyzed normal commercial activity in most business sectors, many companies are now facing serious financial difficulties. Quite often, distressed businesses are a potential threat to the banking system, which may be exposed to the risk of a non-performing loan (“NPL”) problem.
To address such a potential risk, the National Bank of Ukraine (“NBU”) in its official Letter dated 27 March 2020 (No. 32-0009/15930) recommended the banks to take timely and pro-active measures to overcome the anticipated negative impact caused by the introduction of the ‘coronavirus quarantine’, which imposed significant restrictions on businesses.
As such, the NBU called for the banks to introduce so-called ‘loan repayment holidays’ during the quarantine period, along with the further possibility of restructuring the loans of bona fide borrowers who show a real need for such restructuring caused by quarantine measures.
- What’s for the Borrowers?
- What’s for the Banks of Ukraine?
I. What’s for the Borrowers?
Given there is no one-size-fits-all action plan for every case, the NBU has laid down some guidelines and recommendations regarding structuring further ‘bank-client’ relations in anticipation of the risk of a non-performing loan problem due to the quarantine.
Apart from a general recommendation to use the Regulation No. 97¹ as a possible restructuring toolkit, the NBU recommends that banks:
- Consider postponing the repayment of the principal loan as per schedules for the duration of the quarantine², or, in difficult cases, consider the capitalization of interest payments (‘loan repayment holidays’).
- Consider restructuring measures for the period beyond the quarantine.
It is important to note that ‘loan repayment holidays’ with further restructuring possibility are not automatically triggered, and require actions from either party.
The suggested anti-crisis measures are surely important now as never, as they provide some temporary relief for businesses in immediate distress.
How does it work?
WHO can initiate? – Banks or bank clients (individuals and legal entities) by contacting each other via remote means of communication (phone, email etc.);
WHO is eligible? – Individuals or legal entities suffering financial distress due to the coronavirus quarantine, and unable to further service the loan as per the schedule, provided they duly performed as at 01 March 2020;
WHAT is required? – Legal entities must provide evidence of a sufficient temporary decrease in income or termination of operations; medium and large businesses are also required to provide a financial report for the preceding period and information on their current financial situation;
WHO leads the process? – The restructuring terms and conditions are defined by the bank, taking into account the borrower’s economic needs.
II. What’s for the Banks of Ukraine?
To facilitate ‘loan repayment holidays’ and restructurings without additional stress being placed on the banking system, the NBU, by its Resolution No. 39 (dated 26 March 2020), allowed for some ‘relaxation’ of the application by the banks of Ukraine of the Regulation On determination by banks of Ukraine of the credit risk on active banking operations, approved by the Resolution of the Board of the NBU No. 351 (dated 30 June 2016).
As such, as of 28 March 2020 the banks of Ukraine are temporarily allowed, inter alia, not to apply the criteria, they would normally use to declare the occurrence of an event of default to loan contracts which have been amended in connection with financial difficulties as a result of quarantine measures, provided a respective borrower had kept up with loan payments as at 01 March 2020, and has undergone loan (debt) restructuring with the bank within the period from 12 March to 30 September 2020.
In other words, it allows the banks of Ukraine to retain a ‘status quo’ with the restructured borrowers without triggering the latter’s event of default on account of ‘overdue debt’, that would normally require banks to allocate provisions for the full amount of debt.
The suggested anti-crisis measures are surely important now as never, as they provide some temporary relief for businesses in immediate distress and, at the same time, allow for the banking system to stay afloat by preventing accumulation of a non-performing loan ‘burden’. This should suffice as a short-term measure, and when dealing with a one-by-one bank-client scheme.
However, in the longer term, and where there is a need to deal with a number of creditors, we would recommend availing of a formal financial restructuring procedure as per the Law of Ukraine On Financial Restructuring, or, should the creditors be un-cooperative, to use the preventive restructuring procedure as per the Code of Ukraine on Bankruptcy Procedures.
¹ Resolution of the Board of the NBU dd. 18.07.2019 No.97 ‘On Adoption of the Regulation on organizing the process of management of distressed assets in the banks of Ukraine’;
² Which is 24 April 2020 for Ukraine, unless extended further.