The Code of Conduct can be an effective tool for regulating loans to businesses and individuals.
What is the Banking Code of Conduct?
It is a procedure established by the Bank of Greece and provides for specific steps and times, in order to settle loans in arrears with the bank or the loan manager.
Who is it for?
The Code of Conduct applies to all borrowers who are natural persons such as employees, pensioners, workers, freelancers, self-employed and micro-enterprises with average sales of up to €1,000,000 over the last 3 years. It does not apply to medium and large enterprises.
Does it concern only debtors or also guarantors?
The provisions of the Code of Conduct apply equally to guarantors, whether natural or legal persons.
What are the exceptions?
The exceptions concern:
- Loans that have been terminated before 01.01.2015.
- The claims against the borrower that do not exceed:
α) The amount of 1.000€, in the case of claims against borrowers of natural persons.
b) The amount of 5.000€, in cases of borrowers of legal entities – micro enterprises.
This amount is calculated as the sum of the borrower’s debts to the credit institution.
- Loans to legal entities that are not included in the microenterprise category.
- Legal persons in liquidation.
- Natural – legal persons who have applied for the settlement of their debts through the Extrajudicial Mechanism (Law 4738/2020).
How long does the process take?
According to the law, the borrower must receive a proposal for debt adjustment within 2 months from the moment he/she submits the relevant completed forms (with the necessary financial information) to the bank or the loan manager.
What is the Delay Resolution Procedure (DRP)
Each Bank or fund-servicer is obliged to apply the following steps in cases where borrowers are or may be in arrears:
1. Contacting the borrower
The Bank – Loan Servicer, in case the loan debt exceeds 60 days in arrears, must send the borrower afirst letter (within 30 days) regarding the inclusion in the D.E.C.
Among other things, the letter will invite the borrower to submit the necessary forms and supporting documents within 15 working days of receipt of the letter.
What does the1st letter contain?
The letter includes information such as the date the debt first fell into arrears, the number and total amount of instalments due, the outstanding balance of the debt and the interest rate for late payment. In addition, the obligation of the debtor to complete a) the “Standard Financial Statement” (SFS) if the debtor is a natural person and b) the standard financial information form if the debtor is a legal person (i.e. a micro enterprise).
In case the borrower does not respond to the1st letter, the bank or loan servicer must, within 30 calendar days of the expiry of the above deadlines, send a 2nd letter warning you of the prospect and consequences of being classified as “uncooperative”.
By classifying the borrower as “uncooperative”, the bank or the loan administrator is entitled to take legal action to satisfy the claims, e.g.: termination, issuing a payment order, taking injunctive measures, compulsory seizure of movable or immovable property, as well as the sale of collateral provided by guarantors or third parties.
2. Gathering financial and other information
- The Natural Person (individual/freelancer/self-employed person/individual enterprise), must complete theformStandard Financial Statement FormT.O.K., accompanied by the necessary supporting documents referred to in the Form of Mandatory Supporting Documents for Natural Persons.
- The Legal Entity must complete the form “Information of the Legal Entity Participating in the I.E.C.” accompanied by the necessary supporting documents mentioned in the Form of Mandatory Supporting Documents for Legal Entities.
3. Evaluation of financial data
The borrower’s financial situation.
The existence or otherwise of the borrower’s assets is an important assessment factor for the bank or loan manager. In case there is no real estate or it is encumbered by other creditors, then the bank or loan servicer will be more tolerant of a partial debt forgiveness solution.
The borrower’s current ability to repay
The bank and the Fund are obliged to take into account the actual repayment capacity of the borrower, as the well-known saying goes, “Thou shalt not receive more than thou shalt not have”. In other words, and for the creditors themselves, there is no point in pushing the borrower towards an arrangement that the borrower will not be able to support and which arrangement will not be honoured in the end.
Therefore, elements that should be taken into account by the bank or fund in order to formulate a realistic arrangement that will be respected, in addition to income, reasonable expenses, are the obligation to make arrangements with other creditors such as banks, funds, the Greek state and insurance funds.
The borrower’s financial behaviour history
It refers to the borrower’s past trading behaviour. For example, is this the first arrangement of the debt? Have there been other previous arrangements which have not been complied with and to what extent? Are there any debts to other creditors? Have they been settled and if so, have they been honoured?
These are some of the questions that the bank or loan manager will be asked to answer in order to determine whether the borrower (natural or legal person) is a bona fide negotiator or a strategic defaulter.
4. Propose a suitable solution
After the stage of assessing the economic evidence, the next stage is to propose an appropriate solution or arrangement.
The proposed solutions fall into 3 main categories:
Short-term arrangements: These are solutions of up to 2 years to help the borrower from a temporary inability to service his/her loan.
Indicative solutions: a) Arrears Capitalization, b) Reduced payment above IO, c) Interest only, etc.
Long-term arrangements: These are arrangements with a duration of more than 2 years and are usually applied in cases where the borrower’s financial situation has changed for the worse.
Indicative solutions: a) Interest Rate Reduction, b) Loan term extension, c) Partial debt forgiveness, etc.
Final settlement solutions: these are solutions that lead to the final settlement of the loan with the bank or the loan manager (fund).
Indicative solutions: a) Voluntary surrender or sale of property, b) Settlement of loans, c) Auction collateral repossession, etc.
Is the borrower obliged to accept the proposed solution?
After the bank or loan servicer makes a proposal, the borrower has three options, a) Accept the proposal, b) Counter-propose another proposal in writing, or c) Refuse in writing.
5. Objections procedure
At this stage, the borrower can object to the proposal offered to him (if he has not been declared “uncooperative”) to the bank’s or the loan manager’s objections committee, but the objection is limited to formal reasons concerning the procedure and not to the content of the proposal.
Digital Code of Conduct platform
Until recently, the Code of Conduct procedure was carried out by the borrower sending the relevant forms and supporting documents to the bank or the loan manager, without the Bank of Greece supervising and ensuring that the procedure was strictly followed.
The digital platform of the Code of Conduct for Banks is now a reality, through which the stages of the Delinquency Resolution Procedure (DRP), as described above, are implemented.
The borrower, whether a natural or legal person, enters and identifies himself/herself on the platform using the taxisnet codes and follows a step-by-step procedure until he/she submits his/her application, by VAT number and by credit institution or loan manager.
Access to the digital platform is provided only by the debtor, the credit institution or loan manager and the Bank of Greece (for the exercise of its supervisory functions). However, the role of the authorised adviser is not foreseen, as in the out-of-court mechanism, as it is reasonable that many of the interested parties will need the assistance of an adviser, both for completing the application form and for monitoring and negotiating the termination of the arrangement with the bank or loan manager.
The purpose of the Code of Conduct for Banks from the beginning of its implementation (early 2015) was to set rules in the regulation of loans in arrears between borrowers and banks, in order to accelerate and strengthen the effort to reduce them.
In practice, the bank code of conduct does not seem to be the first choice of the bank or the loan manager, who do not prefer its strictly structured procedure, but the direct approach to the borrower to exert more pressure to “lock” more directly and quickly the regulation proposal they are promoting.
On the contrary, the code of conduct procedure for the borrower, which the borrower can activate himself, “puts a brake” on the aggression of the bank and the loan manager, forcing him to follow a stricter negotiation procedure, which allows the borrower to come back with a counter-proposal. Besides, the operation of the digital platform of the code of conduct seems to be moving in the right direction, as it facilitates the supervision and control of its proper implementation, in order to make it more effective in reducing non-performing loans.
The negotiation of a loan settlement is a “battle” in which each side should make sure to exploit every possible advantage in order to achieve the desired solution.
Unfortunately, however, practice shows that the loan manager (fund) enters the negotiation with the “air” of a winner who imposes the terms of the arrangement and this may be justified to a certain extent when the borrower lacks the skills to negotiate effectively and obtain a favourable arrangement for his borrowing.
For this reason, it is advisable for the borrower to choose to trust a professional – knowledgeable in the field, who will be able to secure a really good deal and protect him from the first deal proposed by the loan manager, which will usually be the worst possible.