Expert opinion

The use of the debt restructuring mechanism is part of the banks' credit strategy in times of war. This opinion was expressed by Olena Yermolova, Chief Risk Officer, Member of the Management Board of GLOBUS BANK.

She noted that at the beginning of the full-scale invasion, Ukrainian banks massively implemented a ‘loan repayment holidays’ scheme: changes were made to repayment schedules and monthly loan payments were deferred for several months.

‘At that time, it gave borrowers time to understand their personal situation and resume loan payments accordingly. For example, all principal repayments on most car loans and mortgages at Globus Bank were postponed for 6-12 months, and not only the principal but also the interest on consumer loans were postponed,’ the expert said.

Olena Yermolova noted that since the second half of 2022, when the threat of full occupation was over thanks to the Armed Forces of Ukraine and the country was slowly returning to a more or less normal ‘rhythm’ (business revived, people started working, etc.), banks have abandoned mass deferral of payments and returned to the usual restructuring, the basic rule of which is that the loan debt should not grow, and the bank should have some confidence in the borrower's prospects for repayment of the accumulated debt. Accordingly, the expert believes that now it is not worth counting on a full-fledged ‘loan repayment holiday’, i.e. the postponement of all payments to the future.

‘As of May 2024, only 2.6% of Globus Bank's pre-war mortgage loans and 8.5% of car loans were overdue for more than 90 days. Even with these loans, almost 30% of the loans are being paid in part, and there are reasons to believe that the borrowers will soon return to their usual ‘schedules’ or restructure their loans. We understand that the military situation took everyone by surprise and the most appropriate decision was to implement restructuring. After all, loans that are not repaid are a significant problem for both the borrower and the lender. That is why debt restructuring can be a good way out of a difficult debt service situation,’ the banker said.

If the borrower fails to repay the loan, he or she gets a negative credit history, the prospects of obtaining new loans in the future decrease with each day of delay, the debt grows and sooner or later, by court order, his or her property is put up for sale, and the balance of the debt is deducted from the salary on a monthly basis. For its part, the creditor is forced to make reserves, spend money on lawyers and ‘problem solvers’, and pay court and enforcement fees. The lender loses the income that would have been used to ensure timely payment of interest on deposits, etc.

‘Obviously, both parties are always interested in solving the problem of an outstanding loan, unless of course the purpose of obtaining the loan was fraudulent on the part of the borrower or lender from the very beginning,’ she said.

Olena Yermolova also emphasised that ‘loan repayment holidays’ with the postponement of all payments make sense only for short periods and in cases of extreme events, such as military aggression against Ukraine.

‘In other cases, this approach leads to “chronic illnesses”, as neither the bank nor the borrower will solve the problem by “postponing” the payment of mandatory payments, but only complicate it. The debt will grow, and at some point the situation may come to a standstill, and it can no longer be resolved with minimal losses, for example, by selling the property purchased with credit funds,’ the banker stressed.

According to her, banks are almost always ready to agree on the restructuring of non-performing loans, as they are interested in a high-quality loan portfolio. However, restructuring, and even more so ‘loan repayment holidays’, are not a panacea in all cases. According to Yermolova, a borrower may currently be offered a restructuring if he or she is at least partially servicing the loan and is able to pay the interest that will accrue after the restructuring in the coming months.

In this case, the main restructuring instruments may include:
1) Extension of the loan term and, accordingly, reduction of monthly payments.
2) Increasing the loan by the amount of overdue payments.
3) Setting up a repayment holiday for several months, when the borrower will only pay interest on the loan.
4) In some cases, a reduction in the interest rate on the loan for a certain period may be considered.

‘Granting and receiving a loan in wartime is a very responsible transaction for both the borrower and the lender. On the one hand, a loan, for example, opens up new opportunities for business development, purchase of necessary goods, home repairs, etc., and on the other hand, a loan can become a yoke, a burden that will ruin a citizen's life. Therefore, it is important for potential borrowers to make a decision on whether to take out a loan only after a detailed and complete analysis of their financial situation and future prospects. But the most important thing is that the bank is always ready to treat the problem with understanding and offer the best solution that will satisfy both the borrower and the lender,’ summed up Olena Yermolova.