The next big step for non-performing “red” loans
The next big step for non-performing “red” loans
The next big step for non-performing “red” loans
19 July 2023

By Theodoros Kalantonis, Executive Chairman of doValue Greece


Since 2020, banks have managed to purge their balance sheets of over € 70 billion of non-performing loans, by using the securitisation tool and implementing the Hercules (I and II) state-guarantees programme. During these 3 years, the servicing companies that undertook to manage these loans on behalf of institutional investors or SPVs falling under the Hercules programme, managed to settle loans amounting to € 35 billion, for over 700,000 borrowers.

What is the current situation of these loans? Almost all of them are still with the SPVs that were established precisely to take non-performing loans out of the banks. However, if we take a closer look, their features remind more of typical performing loans than non-performing ones. Mortgage loans represent the most typical case. To achieve settlements, servicers offered restructuring solutions with a 10-, 15- or 20-year horizon –and will continue to do so, within the scope of their mandate. This resulted in new loans, with long-term repayment schedules, which are no different than any other new mortgage loans. For example, the debt over property value ratio, following the restructuring, is the same as the one a bank would calculate for a new mortgage loan, according to its credit policy. 

Supervisors treat these loans in a specific way. According to the European Banking Authority (EBA) guidelines, if these loans are normally performing for 1 year, they are considered performing forborne loans, and after 3 years they are considered cured, i.e. normal performing loans. Therefore, these loans resemble performing rather than non-performing loans.

It is not hard to understand why supervisory authorities hesitate to immediately assign them with a status equivalent to loans that have always been performing. They calculate a default risk and the last thing they would want, taking into account the crisis experience, is to end up with a new generation of non-performing loans within the banking system. However, the return of the previously “red” but now cured loans to their natural environment, i.e. to the performing-loan portfolios, does not pose only risks. It also brings benefits to all stakeholders. 

A natural environment for such reperforming portfolios would normally be the banks. By acquiring these portfolios, the banks would be able to face the greatest medium-term challenge for the industry, which is securing a stable income stream. Greek banks are now robust and profitable, especially following the end of the zero or negative interest rates period. However, Greek banks currently hold performing loans amounting to a total of € 135 billion, when they held over € 240 billion in 2008. On top of the growth of the economy and the respective credit expansion, a readily accessible pool of performing loans includes all those borrowers who managed to overcome the challenges posed by over-borrowing and are now able to serve their debt in a sustainable manner.

For credit servicing companies, transferring performing loans is the natural conclusion of the project they were assigned with. By transferring cured loans back to the banking system, recovery is immediate, and this means that the Hercules SPVs are repaid faster, which of course has a positive impact on the Greek State, which has guaranteed the programme. This income also allows to achieve the -particularly ambitious and demanding- goals that were provided for in the business plans accompanying each securitisation of non-performing loans, within the scope of Hercules programme, including not just general recovery goals, but also specific goals relating to income from settlements. 

Transferring the portfolios will also be beneficial for the borrowers. A borrower that had their banking relationship interrupted during the financial crisis, may return to normal banking conditions once their loan is reintegrated into the performing portfolio (under its new restructuring terms). This is the first necessary step to restoring their access to the banking system and to the full range of banking services, whether it is a new credit card or loan, based on their financial situation as this evolves in today’s better economic environment.

All these create multiple benefits for the economy. When banks have a solid income stream, then they can extend more loans to businesses, which in turn has a positive impact on growth and employment. When financially active individuals and businesses are collectively reintegrated into a normal banking relationship, then there is more room for sound credit expansion, private consumption and investment activity, particularly for the smaller entities, such as SMEs, freelancers and households. 

The current situation favours the launch of such a process. The upward trend of the economy limits the risk of a massive default in settled loans and eases supervisory concerns. At the same time, the expected return to investment grade will further boost investors’ interest and, coupled with the increase in the collateral valuations, it will improve valuations, minimising risks for the Hercules bonds that bear the State’s guarantee. 

Greece has an additional motive which relates to sustaining high growth rates over many years. Overall, loans amounting to € 15-20 billion could return to normal within just a few, 3 or 4, years. This corresponds to around 10% of the GDP. In other countries with a similar situation, such as Italy or Spain, non-performing loans are higher in absolute values. However, no country comes anywhere near Greece, when it comes to the value of non-performing loans compared to the size of the country’s economy. For example, in Italy, non-performing loans are slightly over 2.5% of the GDP.  Figures alone show how significant this boost can be for the growth efforts.

Hence, there is only one path to take. At some point, settled and performing loans need to return where they belong, by transferring the respective portfolios. Apart from the strong message of returning to a pre-crisis financial and banking normal, this process will be beneficial for all stakeholders: the banks, the Hercules programme and the Greek State, the investors, the servicing companies, but also the borrowers and the economy. The current favourable macroeconomic conditions are the most appropriate for us to take the next step supported by the supervisory authorities. 

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