Thursday, February 25, 2016

National Bank of Ukraine Underlines the Need to Restore Trust Between Borrowers and Lenders

The National Bank of Ukraine urges parliament to back Draft Law No. 2286-а  On Amendments to Certain Legal Acts of Ukraine on the Restoration of Trust Between Borrowers and Lenders  (hereinafter Draft Law No. 2286-а).

There are gaps and loopholes in the Ukrainian laws, which are used by unscrupulous borrowers who turn them into quasi-legal schemes  so as not to repay their debts to creditors and  get away with delinquent debt settlement The lenders’ rights are limited when it comes to bankruptcy proceedings. 


Suretyship arrangements are not efficient and banks risk losing the mortgaged property in the event of unauthorized construction. Additionally, when it comes to handling inheritance cases, debt collection procedures are partly covered by the existing legal framework.  The gaps in the laws allow the foreclosure (dispossession) of the debtor's property without the consent of the pledge holder) as well as the suspension of the mortgage enforcement proceeding through legal action, in spite of the outstanding debt owed to the lender.

“All these the shortcomings of the existing legal framework do not make lenders do feel secure in regard to repayment of the loan and discourage the latter from lending again. High risks of default on loans make banking institutions scale down extensive lending programs and conduct business only with credible clients. Some banks are limited to performing only servicing operations for clients, notably, the execution of funds transfers,” said Director of the NBU Legal Department, Mr Oleh Zamorskyi. “Draft Law No. 2286-а is intended to address gaps in the laws, which were earlier used by borrowers to avoid meeting their debt obligations”.  

According to Mr Zamorskyi, the protection of the creditors' rights will help mitigate risks at all stages of the lending process: loan disbursement, loan servicing and repayment)

“We also expect nonperforming loans and distressed debts to decrease in the future once this Draft Law is passed. If creditors have their rights legally protected, they will be able to ease lending conditions for potential borrowers.  The move will help boost lending, cut borrowing costs, thus making banking products lending more accessible and affordable for businesses and individuals,” said Mr Zamorskyi.

Draft Law No. 2286-а, inter alia, will:
• Streamline the legal framework governing bankruptcy proceedings and strengthen the protection of the creditors’ rights in these proceedings;
• Mitigate risks   associated with the use of managed bankruptcy proceedings;
• Minimize the potential of corrupt practices designed to sell the debtor's property to certain persons at reduced prices;
• Ceate appropriate conditions to ensure openness and competitive mechanisms allowing the sale of property at the highest price possible (in particular, it will be impossible to sell a property complex for one hryvnia);
• Provide some additional protection of the rights of creditors under a suretyship agreement and in case of inheritance;
• Eradicate corrupt practices of using unauthorized construction to prevent the satisfaction of creditors' claims with respect to the property under mortgage in cases of unauthorized construction and redesign of the property.

The NBU underlines that without putting in place efficient mechanisms allowing the return of funds to Ukraine’s banking system, it will be impossible for banks to resume lending to the real sector and cut borrowing costs.  Therefore, the adoption of this draft law is strategically important for Ukraine's economy.

Draft Law No. 2286-а was submitted to parliament for approval on 3 July 2015. The adoption of this draft law will enable Ukraine to meet its commitments under the Memorandum on Economic and Financial Policies with the IMF. 

Twenty-six draft laws required for advancing financial sector reforms are pending approval by parliament.  These include strategically important draft laws pertaining to the protection of creditors and financial services consumers' rights, financial restructuring of corporate debts, consolidation of the state regulation of financial services markets functions, as well as anti-money laundering draft laws. 


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