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Reduction of up to 70% in bad loan recoveries by servicers

The coronavirus crisis has brought a sharp drop in the recovery of non-performing loans by servicers and collection companies. This puts a lot of pressure on the revenue of the servicers and leads to a redefinition of the business plans and a renegotiation of the NPL portfolio servicing contracts with the funds.

At the moment, €75 bn in bad loans are in the hands of the servicers. Half of these have been purchased by funds.

For the portfolios with loans in arrears, which are also those that have been mainly purchased by funds, collections have been reduced by 60% – 70%.

The average reduction in recoveries is 50%, and it is kept there thanks to the lowest recovery rate (30% – 40% reduction) from loans that were previously up to date and are now harder to service.

The blow to the servicers (and consequently to returns on funds and banks) varies among servicers. The negative impact of the crisis is greater for servicers who manage mainly loans in deep arrears on behalf of funds, while it is mitigated for companies that have a higher risk spread in the portfolios under servicing.

Corresponding to the blow to receipts is the negative impact on the income of the servicing companies. The servicers that have agreed on a single fee resulting from arrangements, cures, liquidations and loan auctions, ensure that income regardless of the decline in a source of revenue, and their remuneration is not affected.

The vast majority of the servicers, however, are in renegotiations with the funds, both in terms of recovery targets and in terms of their fees. The fees of the servicers consist of a fixed part of the servicing (management fee) based on the remaining loans under servicing and a variable part, which are percentages on recoveries.

The funds are pushing for a total reduction of the fees by servicers, while the servicers are negotiating their fees by increasing the share of fixed revenue from servicing  fees and reducing variable revenue from recoveries.

In addition to discussions with the funds, the servicers have already started discussions with the banks on how to work together to manage the subsidy for small and medium-sized enterprises.

Last Friday, April 10, a ministerial decision was signed to cover the interest on existing up-to-date loans of small and medium-sized enterprises affected by the coronation crisis for the months of April, May and June, with the possibility of extending it for an additional two months, if necessary.

Original Source: Capital

Adaptation/Summary: Kiki Athanasiadis

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