The situation in Hungary
The purchase of loan receivables is a licensed activity in Hungary, meaning that prospective buyers are expected to have a valid Hungarian banking licence (or a licence issued by a European Economic Area member state passported into Hungary). The licensing requirement, as the main impediment to the sale of NPLs (non-performing loans), was reinforced by the discouraging volatility of Hungarian legislation, the lack of effective enforcement measures and the lack of an effective market.
Transfer of loan agreement under the Civil Code
The enactment of the new Hungarian Civil Code (in force as of 15 March 2014) deepened the problem with its rules on the transfer of loan agreements. These rules have been heavily criticised. The Civil Code rendered the security interests of transferred loan agreements terminated regardless of who is affected by the transfer (ie creditor or debtor) or of whether the security provider has given its consent to the transfer or not. If the security provider agrees, however, the terminated security interest can be revived on the same rank.
Non-performing loans (“NPLs”) were on the rise in both the retail and commercial sectors in Hungary, and are causing considerable problems for the Hungarian financial sector. Understanding the problem, the Hungarian National Bank incentivised the banks to clean up their portfolios and decided in October 2015 to introduce additional capital requirements for credit institutions by implementing a systemic risk buffer.
The systemic risk buffer will apply as of 1 January 2017 and will be set between 0 % and 2 % of the entire risk-weighted exposure. Only CET1 instruments will be eligible as additional capital. The Hungarian National Bank will determine the applicable rate of the systemic risk buffer individually for each bank struggling with a problematic portfolio that exceeds the threshold of HUF 5 billion (approx EUR 16 million).
Banks can only avoid falling under the scope of the additional capital requirement if they reduce the rate of non-performing project loans by the end of 2016. Therefore, the additional capital requirement may motivate the banks to deal more drastically with their non-performing project loans (ie restructuring may not be sufficient) and to simply sell them. However, this requires changes to the legal environment.
First step: Amendment of the Banking Act
In order to address the obvious problem, the Hungarian Parliament amended the Hungarian Banking Act (in force as of 7 July 2015), which provides for the regulation of loan portfolio transfers. Under the new regulation, such transfers may be authorised directly by the Hungarian National Bank, bypassing the need for the agreement of either the borrower or the security provider (however, it does not provide for an easement on the banking licence requirement). It is only possible to apply for approval to transfer loan portfolios if the threshold of either HUF 10 billion (approx EUR 33 million) – regardless of the number of contracts to be transferred – or 20 contracts, regardless of their aggregate value, is reached.
Unfortunately, the amendment did not provide a complete solution to the problems created by the general rule of the Hungarian Civil Code (ie the termination of all security interests), because it makes the transfer of loan portfolios possible only among financial institutions (the requirement regarding the banking licence remains), and sets forth the authorisation requirement of the transfer itself with the Hungarian National Bank.
Second step: Amendment of the Civil Code
The amendment of the Banking Act did not provide a sufficient solution. Banks remained reluctant to transfer loan portfolios or even a single loan agreement under the Civil Code, as they feared losing the security interest. Therefore, on 13 June 2016, the Hungarian Parliament adopted an amendment to the Civil Code, the main body of which entered into force on 1 October 2016. The primary aim of the amendment, which entered into force in a hastier manner on 1 July 2016 – according to the government communication – was to correct the Civil Code’s legislative and conceptual shortcomings and to simplify the operation of Hungarian financial institutions, as well as to ensure compliance with the Capital Requirements Regulation (CRR).
The new rule foresees that the security interest does not terminate under any circumstances, but remains in place. The consent of the security provider will only be required if the debtor transfers its contractual position, ie it would be possible to implement a change in the creditor’s position without the involvement of the security provider. This may enhance the secondary loan market and help the financial sector to reduce their overall NPL rate in Hungary.
The additional capital requirement may motivate the banks to deal more drastically with their non-performing project loans (ie restructuring may not be sufficient) and to simply sell them. However, this requires changes to the legal environment.