New Definition of Default
In recent years, the European institutions have issued a series of regulatory documents laying down stricter rules applicable to all financial institutions in the European Union. In order to introduce uniform risk estimate standards to improve the comparability of the conditions in the various financial institutions across all geographies of the Union, a new regulatory framework has been issued. It lays down stricter criteria for the occurrence of default, whereby institutions should assume that their clients have indications of unlikeliness to pay
Entry into force of the new regulatory framework
As a part of the European single banking mechanism (SSM), UniCredit Group, and in particular the Group companies in Bulgaria, will start applying the new stricter European standards from January 1, 2021, which aim to make the credit sector in the Union more homogeneous .
Basic requirements of the new regulation
Strict rules are introduced, imposing that financial institutions should automatically classify their clients as "defaulted" (and their credit commitments to the respective financial institution as non-performing), or they require an individual assessment of the circumstances that lead to the classification as "defaulted".
In case of arrears on a given credit exposure, new materiality thresholds are introduced and in case they are simultaneously breached for a period of 90 consecutive days, the client is classified as defaulted and it is possible to take enforcement actions. The materiality thresholds are defined depending on the type of client as follows:
- For private individuals: absolute value of the default of at least BGN 100, which exceeds 1% of the value of the total credit obligation of the client to all companies within UniCredit Group;
- For legal entities: absolute value of the default of at least BGN 1,000, which exceeds 1% of the value of the total credit obligation of the client to all companies within UniCredit Group.
The exposures where co-debtors are involved will be perceived differently, as the joint and several debtors for a given credit obligation will be perceived as bearers of single risk and they will be assessed separately from the individual exposure of the main borrowers.
Additional criteria for unlikeliness to pay are introduced, upon the identification of which the client will be classified as “defaulted” and enforcement actions can be taken accordingly.
In cases where a renegotiation of a credit obligation is necessary due to temporary or medium-term difficulties, there is a change in the criteria for the renegotiation to be considered compulsory with a material credit-related economic loss, which will lead to the classification of the client as "defaulted".
The new regulation requires institutions to apply a uniform approach to clients who form an economic group, as well as in the presence of jointly and severally liable persons, setting strict rules under which a client's default will be transferred onto the exposure of another client in the cases in which a significant dependence has been established.
The reclassification of defaulted exposures back to non-defaulted status will be after the implementation of specific stricter rules, introducing a mandatory minimum default period even if a customer mends his payment behavior and gets below the materiality thresholds.
- In cases where the amount due but not yet repaid on the credit obligations to the institution exceeds the materiality thresholds for a period longer than 90 days, even if the payments are normalized and the amount due falls below the specified thresholds, the exposure will be put in a probation period of at least 3 months. This time scale is set to monitor whether the normalization of the situation has a short-term or longer-term nature;
- In the event of a change in the credit obligation, which leads to significant remission of the outstanding debt, above the threshold set by the European Banking Authority, the mandatory minimum default period is set at 12 months.