The Central Bank of Cyprus ("CBC") has recently issued
a Directive (Directive on Arrears Management of 2013) under section
41 of the Banking Laws of 1997 to 2013 regarding arrears management
and restructuring of bank customers' debts.
The Directive applies to all credit institutions licensed by the
CBC and to all branches of credit institutions of other member
states operating in Cyprus, unless they are covered by
corresponding provisions enacted in their home member state. It
refers to institutions within its scope as authorised credit
institutions ("ACIs").
The Directive aims to ensure that all ACIs operate efficient and
effective strategies, policies, structures, procedures and
mechanisms to manage arrears and, where necessary, to achieve fair
and sustainable restructurings of credit facilities of borrowers
facing financial difficulties, whether individual or
corporate.
It requires all ACIs to develop a strategy on arrears management in
accordance with the framework set out in the appendix to the
Directive covering the institution's policy on arrears
management for every category of credit facilities, the appropriate
governance structures and control mechanisms and the available
restructuring options. Every ACI is required to establish and
operate an independent centralised department responsible for the
effective monitoring of arrears and for the restructuring of credit
facilities of borrowers in financial difficulties.
ACIs are also required to establish an independent internal appeals
process for appeals submitted by borrowers, and to publish details
of the appeal process on their website and communicate them to the
borrower at the beginning of any restructuring process. As part of
this process they must establish an appeals committee that is
independent of the credit granting, monitoring and restructuring
functions and that is charged with reaching a reasonable compromise
between the borrower and the institution wherever possible.
The Directive also contains a Code of Conduct setting out the
prescribed minimum standards to be observed by ACIs when dealing
with borrowers and guarantors of their debts. The Code of Conduct
on the Handling of Borrowers in Financial Difficulties of 2013
("the Code") is intended to support and facilitate a
meaningful interaction between ACIs on the one hand and obligors on
the other, with the ultimate goal of achieving a fair and
sustainable restructuring. It sets out the responsibilities of ACIs
in the arrears management process and makes a clear distinction
between cooperative and non-cooperative obligors, with the focus on
consensual and voluntary restructuring.
The Code sets out in detail lenders' responsibilities in each
of the six main phases of the restructuring process, namely:
-
Initial communication with the borrower
-
Obtaining financial and other information
-
Assessment of the borrower's financial position
-
Assessment of suitable restructuring options
-
Presentation of restructuring proposals to the borrower
-
Appeals
The Code requires ACIs to make all
reasonable efforts to work with borrowers to obtain all the
financial and other information required to make a proper
assessment of borrowers' ability to meet their commitments and,
based on this information, to attempt to formulate realistic and
fair restructuring proposals. ACIs are required to implement a
pricing policy which maintains a proper balance between the
interests of the institution and its customers, so as to align
interest and other charges with borrowers' repayment capacity
as far as possible.
The CBC considers the issue of arrears management and restructuring
to be of paramount importance in its goal of ensuring financial
stability, since it forms the primary means of improving the
quality and recoverability of ACIs' asset portfolios.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.