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How Can Banks Get Rid of “Toxic” Assets? The New Draft Law


Oleksandr Vygovskyy, attorney at Ilyashev & Partners Law Firm
Source: Ekonomichna Pravda

A new kind of debt management companies will appear soon. They will be able to buy any debts. The options are discussed that would permit redemption of debts for housing maintenance and utilities.

In October 2016, the working group consisting of the representatives of the EBRD, the NBU and the National Commission for State Regulation of Financial Services Markets considered the draft Law of Ukraine “On debt management and improvement of operating principles with the rights of claim”.

The document is designated to make more effective the operating principles with troubled loans, which share in the credit portfolios of the Ukrainian banks is increasing at an alarming rate.

The draft law is the next step towards solution of the problem with the so-called “toxic” bank assets. As you know, recently the Law “On financial restructuring” came into force.

What does the new draft law suggest? Appearance of a new kind of debt management companies.

The mechanism is simple: such companies will redeem the creditors’ rights of claim to the debtors on the basis of the assignment agreements, and then collect the debts and exercise other rights of the creditor.

The draft law interprets the “creditors” as financial institutions, but the working group also discussed the possibility of purchasing any debts. For example, the said debts for housing maintenance and utilities.

Certainly, one of the main issues is the legal status of the debt management company. They discussed, e.g. whether it should be a financial institution. There is no consensus yet.

There is also no common vision on the form of permit to such activities – whether it should be licensed, or may be carried out after obtaining the certificate (registration of the company)?

In any case, the appropriate company must be entered in the special State Register, observe the minimum requirements, criteria and standards established by the regulator.

The requirements similar to those existing in relation to the banks will be set to the members and the owners of the qualifying shareholding in the debt management company.

According to the debt management agreement, all or part of the debtor’s debt to the creditor may be transferred. One agreement may also be concluded in respect of one or more debtors.

The debtor’s consent to conclusion of such agreement is not required, but the debtor must be notified of its conclusion in writing.

After entering into the agreement, the debt management company actually takes the place of the initial creditor. The debtor will have to fulfill his financial obligations towards such a company.

However, activities of the debt management company consists not only in redemption of troubled debt. In this case, it would be little different from factoring companies and collection agencies. At the meetings of the working group they discussed, in particular, the prospect of giving such a company the right to issue bonds secured by the acquired rights of claim.

The companies will be able to direct the funds raised to payment of cost of the assets.

Meanwhile the draft law has no such suggestions, as well as the mechanism for attraction by the company of financing for redemption of troubled debt.

In general, adoption of such draft law will enable to create conditions for purification of the banking system from troubled loans. In turn, it should result in improvement of financial performance of the Ukrainian banks and intensification of lending transactions.

The proposed scheme can also ensure attraction of investors, including foreign ones, in management of the potentially promising assets.

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