THE GIVING IN PAYMENT LAW Romanian Banking Association: "We will have increasingly fewer universal banks in the market"

Reporter: What will be the first effects which the Giving in Payment law, passed a few days ago in the Parliament, will have on the banking system?

Cătălin Pârvu: Because of the immediate effects which I foresee as a result of this law - since there is a fraction of bank customers that will take advantage of the provisions of the new regulations - banks will revise their risk appetite when it comes to lending. Through the application of the law for the giving in payment of properties law for the amounts that aren't covered by the repayment of the collateral, additional provision costs will be incurred. These expenses have not been budgeted and they represent additional pressure for banks. Their profits will be affected and as a result, the earnings taxes they pay will be lower due to decreased profits.

Reporter: What steps will the banks take in order to mitigate these effects?

Cătălin Pârvu: Such a law will lead to the taking of some immediate measures by banks.

Both the terms for granting mortgage loans will be revised, as well as the size of the downpayment. It is possible that this action will also be reviewed by the state, which guarantees the loans granted through the First Home Program (through a 50% guarantee offered by the FNGCIMM). The temptation to use the provisions of this law will probably be greater among those who have bought homes as part of this program. As a secondary effect of the increased risk adversity, reluctance to issuing out mortgage loans will increase as well.

Reporter: It has been repeatedly said that the initiators of the draft law did not make an impact assessment. Why didn't the banks make such a study?

Cătălin Pârvu: No impact assessment has been made, because first of all it must be done starting from the category of the financed asset and keeping in mind the loan to value ratio (LTV). The National Bank of Romania came up with some numbers, but a more granular analysis is needed, because not all customers are going to come in and return their home to the bank.

The financial institutions can make some in-house forecasts, which depend on their own portfolio structure. Banks do not exchange commercial information between themselves, because we are talking about a competitive market after all. Not even the RBA has that kind of data. As I was saying, there have been some estimates made about the impact of this law by the NBR, but I think that they should be made more detailed.

There are certain big loans, probably taken out for speculative purposes, and in those cases the impact will be significant. We will witness immediate losses in the banking system.

Reporter: How "gloomy" is the situation?

Cătălin Pârvu: It is hard to tell how "gloomy" the situation is, but it is certain that the banks' capital buffers will be affected. For now, the solvency of the banking system is very good, above 18%, but next year, new stress tests (AQRs) will follow, and the application of this law will involve further pressure on banks, on the capital issue.

Banks will be affected, and unfortunately, through the retroactive application of this law, the pressure will be placed on the costs offloaded to customers.

A major issue will also be the drop in the price of properties. It is a good thing for the people who have the necessary funds, but the need for homes is greater among the youth. They will be the first affected, because they will no longer meet the requirements for taking out a loan.

The rents may increase, but banks won't start renting, because they need money to serve customers that want loans, because banks are financial intermediaries.

If we are referring to the horizontal effects, banks will restrict lending and at the same time, the industries that are ancillary to the real estate sector, such as the decoration and outfitting of homes, will be affected.

Reporter: A change in the structure of the banking sector is looming ...

Cătălin Pârvu: It is clear that the banking system is going through a continuous transformation, given the new regulations that appear and the additional costs they involve. A bank will have to do the same thing, regardless of its size. Banks will be burdened with certain costs that they may not be able to afford under the current structure.

Reporter: What moves will happen in the market? Do you think that there will be several acquisitions/mergers or that, to the contrary, investors will think twice before entering the Romanian market?

Cătălin Pârvu: Aside from mergers and acquisitions, which yes, will happen in the coming period, banks, particularly small and medium ones, will be forced to increase their efficiency, to focus on a niche. We will probably witness banks specializing, by abandoning certain products or segments, focusing only on a certain area. We will have increasingly fewer universal banks in the market.

As for foreign investors, it will come to the point of talks about the price buyers are willing to pay, about what that price covers and what subsequent obligations appear. If the effects of this law were to influence the price of a transaction in the coming two years, the current shareholder may prefer to keep the bank. The mergers and acquisitions will probably be done between players in the market. I don't think there will be bankruptcies, because there are serious investors in Romania and I think that if the situation requires it, shareholders will increase the capital.

Reporter: There are statements from banks and the NBR which claim that there are many who did speculative transactions, by buying a second or third home, and who will now come in to give the banks their "house at the seaside". Why would a person with good revenues react like that?

Cătălin Pârvu: We need to think like this: What gets clients a higher return on the resources they currently have - keep paying the bank money every month, to repay their loan on a holiday retreat, for instance, which no longer ensures an adequate return on investment or investing that money in something that would allow them to get a greater gain? They will apply the notion used by banks - "stop loss", because that building no longer covers the amount of the loan. The problem will be greatest when it comes to plots of land and real estate developments.

Reporter: Do you think that following the approval of this law, banks will be more open to negotiate with their customers, in order to avoid getting back too many homes in the case of installments?

Cătălin Pârvu: Social cases have been treated appropriately by banks so far as well. Proposals in that regard have been made by the representatives of the ARB during the debating of the legislative project. Unfortunately, they have not been included in the final version of the law. But social cases need to be correlated with the fact that in many situations, borrowers live in that home that was acquired using a bank loan, and the foreclosure will not be possible right away.

I think that every bank has negotiated in the past as well, trying to find solutions for the social cases. But banks aren't willing to accept a solution that applies to every debtor, that would go against the legislation in effect. The losses need to be shared fairly between all parties (the state, the debtor and the creditor), but depositors should also be taken into account, as their money has been placed into loans.

The banking system understands the social issues and is willing to discuss them, but the solutions need to be placed in an adequate framework and in a European spirit. We need to be careful to avoid infringement.

Reporter: Nevertheless, customers keep saying that banks aren't sharing the risk with them...

Cătălin Pârvu: Banks have made their share of mistakes during the boom period. There have been optimistic growth expectations on both sides and this led to speculations being encouraged. Banks have pursued market share because that was the strategy when the economy and wages were growing. I think that the sector footed the bill of the crisis. We would have probably had a lower credit cost if we didn't have the provisions. By resolving a few dozens or hundreds of cases we may affect a few hundred thousands others.

It is true that banks need to get involved more and to convey to their customers that they are interested in the quality of their services. The banking system is always open to discussions for finding acceptable solutions.

Reporter: What are you going to do about bank clerks, which customers have created a wave of hate against in the last few years?

Cătălin Pârvu: There are trainings being done in banks, and financial institutions which fail to provide quality products and services to their customers will lose. It is obvious that there are situations in which banks could have provided more complete explanations at the time the loan was granted, but there is also a culture which we need to develop - respectively not to bite off more than we can chew.

Reporter: Thank you!