The Bulgarian National Bank Approved a Procedure for Deferral and Settlement of Payable Obligations towards Banks and Their Subsidiaries in Connection with the State of Emergency

On 10 April 2020 the Management Board of the Bulgarian National Bank (BNB) approved the draft Procedure for Deferral and Settlement of Payable Obligations towards Banks and Their Subsidiaries - Financial Institutions in connection with the State of Emergency, Introduced by the National Assembly on 13 March 2020. In its essence, the approved document is a private moratorium on loan repayments, as per the Guidelines of the European Banking Authority (EBA)¹

The measures related to the deferral of credit obligations towards banks are dictated by the economic consequences resulting from the anti-epidemic restrictions concerning citizens and businesses, introduced in Bulgaria. As a result of these restrictions, many businesses and individuals may be affected by the economic crisis and face liquidity problems, problems with the timely performance of their pecuniary obligations, etc. On the other hand, this would also affect the activities of credit institutions, as it would increase the number of defaults on their loans. The measures adopted by the BNB are aimed specifically at mitigating such effects. The mechanisms set out in the document approved by the BNB provide for an opportunity to change the repayment schedule of the principal and/ or interest rates on credit obligations without amending key parameters of the credit agreements (e.g. interest rates already agreed upon). This material will briefly review the specificities of these mechanisms.

¹ Guidelines of the European Banking Authority (EBO) on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis (EBA/GL/2020/02)

I. What Are the Requirements towards Credit Debtors Who Wish to Make Use of the Measure?

As per the approved document, the credit debtors must meet certain requirements, in order to be eligible to make use of the moratoria on loan repayments.

1. The credit debtor must not be a credit institution;

2. The obligations of the debtor must arise from a contract concluded no later than 31 March 2020;

3. The credit debtor must have difficulties in repaying his obligations as per the contract concluded with the creditor, or respectively – must expect to have such difficulties;

4. The difficulties must be related to the COVID-19 pandemic and the restrictions introduced by the Act for the Measures and Actions During the State of Emergency, and their consequences;

5. As of 1 March 2020, the obligations of the credit debtor must be regularly repaid or delayed by no more than 90 days;

6. The credit debtor must explicitly state that he/she wishes to make use of the relief measures, proposed by the creditor. The measures shall not be applied unilaterally by banks in case that the clients have not requested this.

 II. Substance of the Relief Measures and Rescheduling Mechanisms

The document approved by the BNB provides for deferral of obligations under credit agreements concluded with banks and their subsidiaries - financial institutions, for a period no longer than 6 months, which expires no later than 31 December 2020 (the document refers to that period as “grace period”). The end date may vary depending on the date on which the client requested to benefit from the deferral and the existence of overdue instalments as of that date.

The scope of the deferral may vary and it may cover all due amounts (interest, principal etc.) or only the principal. Unless explicitly provided for otherwise in the applicable rescheduling mechanism, the amounts unpaid on the initially agreed upon maturity dates, shall be repaid in instalments after the expiry of the grace period, as per the applicable rescheduling mechanism.

The document provides for three types of rescheduling mechanisms and the parties shall be free to agree on which one to apply:

1. Mechanism No. 1 – deferral of principal and interest for up to 6 months

• The due amounts (principal and interest) shall be deferred for a term of up to 6 months, but no later than 31 December 2020.

• The remaining amount of the obligation, along with the unpaid principal during the grace period, shall be repaid as per a new repayment plan, which is 6 months longer than the initial repayment plan, depending on the number of deferred instalments.

• An equal part of the unpaid interest for the grace period shall be added to each instalment as per the repayment plan until the expiry of the credit or within another reasonable shorter term.

2. Mechanism No. 2 – deferral of the principal for up to 6 months

• The due amounts for the principal shall be deferred for up to 6 months, but no later than 31 December 2020.

• The due interest shall be paid as per the contract’s provisions. After the expiry of the grace period, a new repayment plan shall be prepared which shall cover the whole remaining amount of the obligation, including the unpaid principal during the grace period.

• The new repayment plan shall be extended depending on the number of deferred instalments, but in any case for no more than 6 months.

3. Mechanism No. 3, applicable towards revolving products

• Revolving of a credit line shall be permissible, regardless of the fact that due instalments or parts thereof have not been repaid.

• The repayment of the instalments shall be deferred for up to 6 months, but for no later than 31 December 2020.

• No minimum amount shall be set for revolving of a credit limit under credit cards, effective no earlier than 1 February 2020, for up to 6 months, but for no later than 31 December 2020.

• After the expiry of the grace period, the formation of a minimum amount for revolving shall be restored and the credit shall be served as per the initial agreement.

• For a period of up to 6 months, but for no later than 31 December 2020, the due monthly interest under an overdraft loan shall be repaid at the expense of the unused limit or its payment shall be deferred for a period of up to 6 months after the end of the grace period.

 III. Applications for Making Use of the Measure

1. It is envisaged that each bank that has accepted to apply the document approved by the BNB, will publicly announce the offered reliefs on its website, in the bank salons and in other appropriate ways. The announcements shall indicate the starting date of application of the relief measures and the procedure for their application. Even though the banks will in practice determine this procedure, the document approved by the BNB provides for some general guidance in this regard.

2. The request for deferral, sent by the client towards the bank can be sent by any client who meets the requirements as described above in it. I. This must be done no later than 22 June 2020 and the decision of the bank in regard of the request must be taken no later than 30 June 2020.

3. A request by a client can be made both for unpaid instalments whichmaturity date was before the date of submission of the request, as well as for instalments that are not yet due. In case that as of the date of submission of the request the client is not in default, the deferral shall be applied only in view of future instalment that are not yet due.

4. The document provides for an opportunity for credit debtors to waive of the grace period earlier than its end date and to request the preparation of a repayment plan.

In addition to the cases described hereinabove, banks and their subsidiaries - financial institutions, are free to negotiate individual deferral schemes with their clients, as well as other relief measures.

This material is not exhaustive, is only of general nature and does not represent a specific advice or consultation. Should any additional questions arise, please do not hesitate to contact us at tel.: 02/943 37 00, fax: 02/943 37 07, е-mail: office@afa.bg or at: 38, Oborishte Str., Sofia 1504.