The decade that just ended brought significant changes to the banking landscape in Romania. The banks were pushed to restructure their loan portfolios, consumer litigations increased exponentially, the cost of business increased, and Fintech companies started (although timidly) to take a slice of the pie. Populist legislation was enacted to protect consumers years after banking services were contracted. And a wave of acquisitions forced by the increased costs led to changing rankings at the top of the banking sector.
This year came with unexpected challenges, particularly in the form of the well-known COVID-19 virus. Romania applied an emergency status and entered into lock-down from March 16 until May 18, and although some activities have been gradually released, others remain restricted or prohibited.
To alleviate the risks and costs faced by debtors, the Government enacted a legal moratorium for payments owed under credit agreements. Any such debtors could request the application of the moratorium for a period of up to nine months, until the end of 2020. The conditions for the application of the legal moratorium have raised many questions, including, for example, which type of agreements fall under the scope of the new law, what type of creditors are required to comply with the law, what payments may be delayed, and what are the differences in the treatment of certain loans. Many companies and persons affected by the pandemic (or by the lock-down and social distancing measures) have applied to have their debts suspended. In addition, some banks have awarded conventional payment suspensions to clients that did not formally request the application of the moratorium.
Other legislative acts were adopted with the aim of helping small and medium enterprises overcome economic difficulties in the context of the COVID-19 pandemic. A state aid scheme was approved allowing SMEs to benefit from credit facilities for both investment and working capital guaranteed by the Romanian state covering a maximum of 80% of the financed amount (up to RON 10,000,000 for investment loans and RON 5,000,000 for working capital loans (smaller caps may apply depending on the average expenses registered for the working capital over the past two years)). The Ministry of Public Finance is subsidizing 100% of the interest on the above-mentioned loans/credit lines starting from the date the loan was granted and until March 31, 2021. The interest subsidies can also be extended for the subsequent two years (i.e., 2021-2022), but only if the economic growth estimated for this period is below that registered in 2020. Banks are now intensely busy with the approval of credit files for SMEs.
As a result, banks are now supporting their clients with payment moratoria, while at the same time receiving state support in exchange for extending credit to SMEs.
Against this background, we expect that banks may need to consider strengthening the requirements to grant new loans or extend existing loans that are not covered by the state. We also the banks to require a more in-depth analysis regarding risks and mitigants in respect of such loans. Companies active in industries that have thrived or that were not affected during the pandemic will be advantaged. At the same time, we believe that the banks may need to take a closer look at their clients’ activities and projects and anticipate if and where difficulties may appear. This would require a thorough due diligence and understanding of their clients’ business.
The mergers & acquisitions and portfolio acquisitions transactions in the banking sector will likely continue, but we expect banks to act prudently. Targets with more homogeneous products might be in a better position, as they allow for an easier due diligence and assessment.
By Carmen Manuela Peli, Partner, PeliPartners