Business is concerned about the adoption of an unconstitutional law on restructuring foreign currency loans

30/ 03/ 2021

19.03.2021 The Verkhovna Rada of Ukraine adopted in the first reading the draft Law on Mandatory Restructuring of Foreign Currency Loans (On Amendments to Section IV Final and Transitional Provisions of the Law of Ukraine On Consumer Lending (on loans granted in foreign currency) ). The business community, united by the European Business Association, the American Chamber of Commerce in Ukraine, the Independent Association of Banks, and the Forum of Leading International Financial Institutions, is concerned about the Verkhovna Radas decision which contains the risk of passing an unconstitutional law. Besides, it is likely to block the implementation of tasks set by the President of Ukraine for the development of mortgage lending and government programs aimed at providing the population and businesses with cheap money (Affordable housing at 7%, 5-7-9 affordable business loans, etc.). Instead of directing funds to finance government programs, banks will be forced to inject free funds into the capital to cover the negative consequences of the adoption of the Law. This initiative significantly worsens the legal position of creditors in relation to debtors, increases credit risks and risks of loss of assets by creditors. Given the significant shortcomings of the proposed legislation, there are the following reasons to reject the draft law: - unjustified extension of the mandatory (compulsory) restructuring to all consumer loans in foreign currency, for which monetary obligations are not fully repaid, including those that are properly serviced; - violation of the constitutional principle of binding court decisions and the need to reconsider disputes by courts. Thus, it is proposed to recognize an executive document issued by a court decision to recover a debt on a loan that will be subject to restructuring as unenforceable. Such a proposal is contrary to Art. 129-1 of the Constitution of Ukraine on the obligation to enforce a court decision. This will require banks, in case the client violates the terms of the restructuring, to appeal to the court again and go through lengthy court proceedings to obtain court decisions on debt enforcement under the same credit and mortgage agreements; - negative consequences for the State budget as the recalculation of the loan amounts previously paid by the debtor proposed in the draft will require repayment of debts at the expense of the creditor. This will lead to a decrease in the financial result of creditors and to non-payment to the budget of the creditors income tax in the amount of 18% of the repayment amount and the exchange rate difference. In 2020, 74 operating banks provided over UAH 7.09 billion to the State Budget of income tax, which amounts to almost 7% of all budget revenues derived from the payment of corporate income tax; - extension of the moratorium on foreclosure on foreign currency loans, contrary to the position of the President of Ukraine that the extension of the moratorium is one of the deterrents to the resumption of mortgages. The moratorium has been in force for more than six years and allows borrowers to ignore the terms of the loan agreement and avoid enforcement, which has led to an increase in the share of troubled assets of banks, adversely affects their liquidity and solvency and the proper functioning of Ukraines banking system. The moratorium does not encourage borrowers to seek mutually acceptable ways to settle debt and has a negative impact on the ability of banks to meet their obligations to depositors; - the ineffectiveness of the proposed mechanism of loan restructuring, which provides only for the submission of an application for restructuring, while the further actions of the parties are unclear. Thus, transactions and proper execution of contractual documentation, the agreement between the parties on the terms of restructuring are not envisaged at all. The business community emphasized the unacceptability of this document and the need to change the approaches to restructuring foreign currency loans proposed in the draft law. First of all, the rejection of populist decisions that undermine the rights of creditors in Ukraine, fully shifting responsibility for the debtors failure to fulfill its obligations. The relevant appeal to the President of Ukraine was signed on March 26 on behalf of the European Business Association, the American Chamber of Commerce in Ukraine, the Independent Association of Banks, and the Forum of Leading International Financial Institutions. We really hope the voice of business will be heard! Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

19.03.2021 The Verkhovna Rada of Ukraine adopted in the first reading the draft Law on Mandatory Restructuring of Foreign Currency Loans (On Amendments to Section IV “Final and Transitional Provisions” of the Law of Ukraine “On Consumer Lending” (on loans granted in foreign currency) “).

The business community, united by the European Business Association, the American Chamber of Commerce in Ukraine, the Independent Association of Banks, and the Forum of Leading International Financial Institutions, is concerned about the Verkhovna Rada’s decision which contains the risk of passing an unconstitutional law. Besides, it is likely to block the implementation of tasks set by the President of Ukraine for the development of mortgage lending and government programs aimed at providing the population and businesses with cheap money (“Affordable housing at 7%”, “5-7-9 affordable business loans”, etc.).

Instead of directing funds to finance government programs, banks will be forced to inject free funds into the capital to cover the negative consequences of the adoption of the Law. This initiative significantly worsens the legal position of creditors in relation to debtors, increases credit risks and risks of loss of assets by creditors.

Given the significant shortcomings of the proposed legislation, there are the following reasons to reject the draft law:

– unjustified extension of the mandatory (compulsory) restructuring to all consumer loans in foreign currency, for which monetary obligations are not fully repaid, including those that are properly serviced;

– violation of the constitutional principle of binding court decisions and the need to reconsider disputes by courts. Thus, it is proposed to recognize an executive document issued by a court decision to recover a debt on a loan that will be subject to restructuring as unenforceable. Such a proposal is contrary to Art. 129-1 of the Constitution of Ukraine on the obligation to enforce a court decision. This will require banks, in case the client violates the terms of the restructuring, to appeal to the court again and go through lengthy court proceedings to obtain court decisions on debt enforcement under the same credit and mortgage agreements;

– negative consequences for the State budget as the recalculation of the loan amounts previously paid by the debtor proposed in the draft will require repayment of debts at the expense of the creditor. This will lead to a decrease in the financial result of creditors and to non-payment to the budget of the creditor’s income tax in the amount of 18% of the repayment amount and the exchange rate difference. In 2020, 74 operating banks provided over UAH 7.09 billion to the State Budget of income tax, which amounts to almost 7% of all budget revenues derived from the payment of corporate income tax;

– extension of the moratorium on foreclosure on foreign currency loans, contrary to the position of the President of Ukraine that the extension of the moratorium is one of the deterrents to the resumption of mortgages. The moratorium has been in force for more than six years and allows borrowers to ignore the terms of the loan agreement and avoid enforcement, which has led to an increase in the share of troubled assets of banks, adversely affects their liquidity and solvency and the proper functioning of Ukraine’s banking system. The moratorium does not encourage borrowers to seek mutually acceptable ways to settle debt and has a negative impact on the ability of banks to meet their obligations to depositors;

– the ineffectiveness of the proposed mechanism of loan restructuring, which provides only for the submission of an application for restructuring, while the further actions of the parties are unclear. Thus, transactions and proper execution of contractual documentation, the agreement between the parties on the terms of restructuring are not envisaged at all.

The business community emphasized the unacceptability of this document and the need to change the approaches to restructuring foreign currency loans proposed in the draft law. First of all, the rejection of populist decisions that undermine the rights of creditors in Ukraine, fully shifting responsibility for the debtor’s failure to fulfill its obligations.

The relevant appeal to the President of Ukraine was signed on March 26 on behalf of the European Business Association, the American Chamber of Commerce in Ukraine, the Independent Association of Banks, and the Forum of Leading International Financial Institutions. We really hope the voice of business will be heard!

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.