It is hoped new laws will reduce the burden of bad loans on Italian lenders, paving the way for the improved transmission of credit.
The lack of bank lending to SME’s and households has been one of the key obstacles to a stronger recovery in the eurozone.
The main reason for this is the high number of bad loans which banks still have on their books, which tie up capital that could otherwise be used to lend in the form of new loans; which in turn has contributed to their characterization as 'zombie banks'.
Despite the ECB lending out more money to banks so that they can increasing transmission of credit to the wider economy the problem of the large cache of bad - or non-performing loans (NPLs) as they are called, continues dog a smoother pass-through of credit, and thus the potential for faster growth.
The buildup of NPLs reflects both the prolonged recession as well as structural
factors that have held back NPL write-offs by banks.
Indeed, part of the reason for the build-up of NPL’s is as a result of the specific laws governing lending practices in the Euro-area, where, “write-off rates for banks remain much lower than for US or Japanese banks," according to LSE economists Gerba and Macchiarelli.
The pair wrote a recent EU committee paper on the matter, entitled: “Policy options and risks of an extension of the ECB’s quantitative easing programme: An analysis” .
More specifically the problem can be traced back to the, “limited tax deductibility of provisions, weak debt enforcement and ineffective bankruptcy procedures that discourage write-offs and increase the cost of recovering assets provided as collateral for loans,” according Aiyar et al.
The problem is particularly acute in Greece, Italy and Spain as can be seen on the chart below which shows the number of bad loans as a percentage of total loans in various countries:
Now new legislation in Italy promises to tackle the problem by making it easier for creditors to recover assets used as collateral for loans.
According to a report from Italian lender UniCredit, one of the new laws will allow for the fire-sale of non-residential assets should a creditor default without recourse to going through the court system:
“The enlargement of the so-called “patto marciano” provides for the possibility that, for loans whose collateral is real estate (which is not intended to serve as the residence of the owner of the business), parties may enter into a contract for the sale of the asset.
"This contract becomes automatically effective should the borrower default. Thus, the new regime should allow debtors and creditors to bypass Italy’s court system should the debtor default.”
Another law involves the right of creditors to take provisional ownership of assets, such as plant or machinery, and should the debtor default gain automatic ownership as a claim as a claim against the bad debt.
This also enables the debtor to use the asset in the meantime so that they can carry on trading in an attempt to cut the debt legitimately.
“Put simply, the law introduces a legal claim against a non-real-estate asset in order to secure payment of the debtor's obligation – at the same time, this will also allow the debtor to continue to use the asset for the firm’s activity. The lien holder does not have physical possession of the asset in question but only a legal right,” say UniCredit.
New laws will also speed up the whole liquidation of assets:
“The introduction of stricter time limits to expedite liquidation compared to previous procedures, such as, for example, a reduction in the amount of time accorded to the debtor to raise objections. In addition, the decree allows courts to make a provisional injunction, even in the face of opposition from the debtor.”
A second set of measures highlighted by UniCredit, will enable more flexible and quicker modes of communication during the settlement process, including the, “ability to conduct hearings and creditors’ meetings via telematics systems and online tools.”
The creation of a legal databased will also, it is hoped “increase transparency” as well as process efficiency.
Another feature of the Eurozone debt market which has increased the dead weight of non-performing loans has been the lack of a market for distressed debt in Europe.
It is hoped, however, that these measures will help make Italian debt more attractive to buyers of distressed debt:
“The package approved is intended to complement measures already implemented by the government and by financial institutions to manage the problem of the large stock of bad debts and their current low market valuation.”
The latest set of provisions follow the setting up of the state-guarantee scheme for NPL’s in February:
“This joint effort mainly envisages the state-guarantee scheme for bad loans (GACS), introduced at the beginning of February, and the privately-backed alternative investment fund Atlante (Atlas), created to underwrite capital hikes and to buy bad debt.”
Italy is not the only country to try to tackle the problem of Non-Performing Loans, in Spain too the government has introduced measures, including a bank for bad debt.
Spain has also introduced new laws help companies which have entered into administration to acquire bridging loans helping them to continue trading through trough periods in the hope perfectly viable business will not be lost due to a shortfall in credit.