Non-performing loans (NPLs), commonly known as "bad loans", are bank loans that are in arrears or that the borrower is entirely unable to repay. The 2008 financial crisis and the recession that followed made it very difficult for many Greek citizens to repay the business, mortgage or consumer loans they had taken out. As a result, this led to an accumulation of non-performing loans in the banks. This build-up of NPLs slowed down bank lending and economic growth, and threatened financial stability.
What is the current state of NPLs in Greece?
Today, half of the bank loans in arrears in Greece have been terminated, while the remainder are split between loans more than 90 days past due and loans classified as unlikely to pay, according to European Central Bank data. It should also be noted that approximately EUR 15 billion of non-performing loans relate to loans under legal protection.
In order to address the problem within the Greek economy, the Greek State took a number of measures, such as:
Strengthening the supervisory and regulatory framework for Greek banking institutions by requiring them to establish an organisationally independent unit for the management of non-performing loans, to adopt a clear strategy for managing such loans, to categorise the non-performing loans in their portfolio on the basis of clear criteria and characteristics, to develop restructuring solutions for each category of non-performing loans and to carry out a better assessment of borrowers' financial situation, to ensure that the implementation of such management is supported by appropriate IT systems, procedures and management information systems, and to submit enhanced reporting to the Bank of Greece regarding non-performing loans.
What is the legal framework for the transfer and management of NPLs in Greece?
Relatively recent laws of 2015 and 2016 introduced the possibility of assigning the management of, or transferring, performing (subject to conditions) and non-performing bank loans to loan servicing companies and companies acquiring claims arising from non-performing bank loans. In turn, the Bank of Greece established the regulatory framework for the licensing and supervision of companies engaged in the management and/or transfer of claims arising from bad loans.
A characteristic example of the above strategy was the "Hercules" I and II Scheme, which of course also included a Greek State guarantee. In mid-2020, banks under the direct supervision of the ECB held non-performing loans worth over EUR 550 billion, representing almost 3% of their total loans. Non-performing loans have been steadily declining since their 2016 peak (approximately EUR 1 trillion). However, the economic crisis caused by the coronavirus pandemic is likely to lead to a sharp rise in non-performing loans: in one scenario, they could reach a level of EUR 1.4 trillion by the end of 2022.
What is the subject matter of a contract for the transfer of bank claims in Greece, and what is the procedure?
Under the provisions of the applicable domestic legislation, the subject matter of a contract for the sale and transfer of claims arising from loans and credit facilities, as described above, consists of claims arising from bank loans, both their principal and the interest accruing thereon, as well as credit facilities that may have arisen from open current accounts, the discounting of bills of exchange, etc.
As regards the validity of such a transfer, the law lays down certain requirements, such as written form and publicity. More specifically, an agreement for the transfer of claims is a formal legal transaction, and therefore, if the written form is not observed, it is void from the outset. In addition, the law requires that the contract be registered in the "Public Register". The transfer of the relevant rights takes effect against the debtor and third parties from the moment of the above registration. The law makes reference, by analogy, to pledges, subjecting agreements for the transfer of claims to the publicity procedure through their registration with the competent pledge registry, at which point rights are acquired against third parties. In addition to registration in the Public Register, the law also provides for written notification of the debtor and the guarantor regarding the registration of such a contract. Notice may be given to them by any appropriate means, including electronically.
How can secured claims arising from NPLs be satisfied?
Upon completion of the transfer procedure described above, the new owner of the claims steps into the position of the lender and may proceed with the attachment of the debtor's assets (movable and/or immovable) and their liquidation, either through the auction procedure (now conducted electronically) or through a consensual route agreed with the debtor (often following a partial write-off or "haircut" of the debt).
Furthermore, in cases of compulsory sale (auction), technological progress and today's global conditions allow the auction to be conducted electronically, a procedure that guarantees the unhindered participation of interested parties and leads to the highest possible auction price. Electronic auctions are conducted through the electronic auction platform (https://www.eauction.gr/) by notaries certified for this purpose. The auction must be scheduled seven months after the attachment and in any event no later than eight months.
To date, Nexus Law Firm has handled a number of matters on behalf of debtors relating to contracts for the transfer of claims arising from non-performing loans. We also recently completed our first transaction on behalf of foreign purchasers/investors in secured NPLs, addressing the legal issues from the opposite side as well. This transaction concerned the purchase of a portfolio of secured NPLs with a total value of approximately EUR 14 million, and the investors' business plan includes the settlement of the debt or the development of the encumbered properties located in Athens. It is certain that transactions relating to NPLs being transferred or already transferred will become far more frequent in the future.