The Italian government is pushing a new draft law regarding bad loans. If passed, it could halt investment in the sector, affect the ability of banks to grant new loans and send shockwaves across the national non-performing loans (NPL) market.
Under the new proposal, first put forward by prime minister Giorgia Meloni’s Fratelli d’Italia party at the end of last year, eligible individuals and small and medium-sized businesses that have defaulted on their loans would be able to repurchase their debt and potentially bring their businesses back to work.
The framework would allow borrowers whose debt has gone sour to buy back a loan that was sold by a bank to an investor. Under the terms of the draft law, the scheme applies only to loans with a value of up to €25m that have been classified as impaired between 2015 and 2021, and then sold by banks to a third party before the end of 2022.
The debtor would be given the option to purchase their bad loans for the same price at which the bank sold them, plus a premium of 20% if no recovery proceeding has been initiated, or otherwise 40%.
Although the proposal aims to rescue borrowers who have seen their debt go sour due to external factors like the economic crisis and the Covid-19 pandemic, investors are concerned that it could have severe repercussions on the NPL market. Since the 2008 financial crisis, the market has allowed Italian financial institutions to offset millions worth of NPLs.
Selective nature of the proposal
The measure would give borrowers an advantage, granting them the option to scrap their debt after it has been sold. Once the process is completed, such borrowers would no longer be listed as non-performing on the country’s Central Credit Register.
Nevertheless, a recent report from Fitch Ratings says it is still to be determined how many borrowers would have enough financial resources to access this mechanism and effectively change their defaulted position.
Dino Crivellari, a lawyer who previously served as a manager at UniCredit, says that due to the specific time frame to which the proposal applies, only a small percentage of borrowers will be eligible. “Additionally, due to the premium that borrowers have to pay, I believe that only the wealthiest borrowers will be able to take advantage of this scheme,” he says.
Furthermore, the rules could potentially allow borrowers to stop repaying their loans, simply repurchasing them after they have been sold to an investor for a fraction of their original price. A further incentive is given by the fact that the rules of the European Central Bank force banks to offload bad loans.
Effect on the NPL market
According to a recent report by audit firm PwC, Italy remains one of the largest non-performing exposure markets in Europe. In 2015, the country embarked on a vast deleveraging process that saw it reduce its non-performing exposures (NPE) stock from €341bn to €58bn by March this year. The country’s total NPE gross ratio was squashed from 18% to around 3%, thanks to the help of mainly foreign investors.
Gabriele Guggiola, partner at PwC Italia, says that the proposal would “undermine the efficiency of the NPL market” by making it harder for banks to find investors willing to buy their bad loans, as well as potentially encouraging borrowers to default on their loans.
Since 2015, the Italian NPL market has drawn in multiple international funds that have made major investments within the sector. This activity has allowed banks to sustain their lending activities by selling their bad loans. However, analysts believe that a lack of certainty could destabilise the dynamics of a segment of the banking sector that is already quite sturdy.
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Mr Crivellari says that a long-term risk of the proposal is that banks will be less interested in selling their NPLs, and that investors could be turned off investing in the sector due to the retroactive nature of the framework. “Retroactive laws are always frowned upon by the market as they cause uncertainty,” he says.
The proposal could also have an effect on the GACS programme, a loan guarantee provided by the Italian government that has helped domestic lenders offload bad debt since its implementation back in 2016. Analysts have differing opinions on the scale of the impact that the proposal would have on the programme.
Ms Meloni’s government is expected to push to approve the new law by the end of the year.
