LGD (loss given default – the estimated loss in case of default) for unsecured consumer loans and for credit cards remains the highest (70% and 60% respectively), while for real estate loans and for mortgage-secured consumer loans, LGD is around 20%, says study.
Bankers now estimate they will now recover more of the debt related to mortgage loans, which means they expect to get a better price when selling the guarantees. In the November survey, banks expected a loss of 25% to 30% from secured loans that default.
The banks’ expectations could prove too optimistic given that prices on the real estate market continued to fall in the last few months. Moreover, the banks have a stock of thousands of properties repossessed from bad payers, for which they have a very hard time finding buyers.
In fact, central bank experts recommend a cautious interpretation of the average loss in case of default.
“LGD information must be interpreted with caution, considering the short series of data available, the fact that bank methodology for calculating this indicator is in the process of being developed and the problems that go with the first reports.”
In the case of unsecured consumer loans, banks also expect an increase in the ratio of debt recouped, whereas in autumn they only expected to recoup 25% of the amounts owed by clients.
Consumer loans that are long past due are often sold to debt collection firms, but banks prefer to handle the secured loans in default themselves. The latest data show that in the first six months of last year debt collectors bought loans worth a cumulated EUR350 million.
Losses from companies’ non-performing loans amount to 35% on average, while the remaining amounts are recouped by selling the guarantees. Most corporate loans are backed by mortgage guarantees.
The central bank’s survey reveals that microenterprises are seen as posing the biggest risk, while big firms are seen as much more stable. According to data published by the central bank in the autumn of last year, around a quarter of loans granted by banks to microenterprises were more than 90 days late on payments. This compares with less than 4% of loans to larger firms.
When clients are late on their installment payments, banks look to find a solution, but if the payments are not resumed, the banks move on to foreclosure sales. This entails freezing the amounts in the client’s other accounts and selling the guarantees, if they exist. The bank can ask in a court of law for a portion of a debtor’s income to be retained for payment of the debt.
Individuals and companies have bank loans worth a cumulated 225 billion lei (EUR51.6 billion), with an average 14% of these loans being more than 90 days past due.
Loan more than 90 days past due are included in the loss category, and the central bank asks banks to set up provisions that can fully cover these amounts, which means the chances of payments being resumed are close to zero.
The provisions set up by banks to cover losses from non-performing loans exceeded RON30 billion (almost EUR7 billion) at the end of last year. The big provision spending is the main reason for the banking system’s losses in the last two years, It has eroded the operating profit of many banks and forced shareholders to come up with additional money. (EUR1=RON4.355)
(English version by Daniela Stoican)