In response to the COVID-19 pandemic, Slovenia swiftly introduced certain measures in the field of banking with the goals of promoting the liquidity of Slovenian businesses and stimulating the banks to support the country’s economic recovery. Such measures included mandatorily available 12-month moratoria on bank loans (further supported by a smaller-sized EUR 200 million state guarantee scheme for the moratoria-affected amounts), and a larger-scale EUR 2 billion state guarantee scheme for certain new bank loans. However, such measures proved less popular that expected.
According to the information shared by the Bank of Slovenia, by the end of June 2020, corporate borrowers filed moratorium applications for only approximately 5.6% of the total number of corporate loans, and the total amount of deferred liabilities in the period amounted to a modest EUR 365.4 million. Moreover, while by the end of June 2020 Slovenia’s banks reportedly received 1,200 applications for new liquidity loans, in a total amount of EUR 668 million, by mid-July 2020 only three new loan transactions had been backed by the state guarantee, worth a total of just EUR 16.5 million.
The modest success of these measures can be attributed to several factors.
The Slovenian regulations on mandatory moratoria left certain very material questions open to interpretation, such as how the moratoria should be treated in view of prudential requirements applicable to banks, what interest rates should be applied in case of margin ratchets, how to effect moratoria for loans secured with state or quasi-state guarantees where the banks are not allowed to change loan terms, and how the banks can achieve legal certainty in assessing whether or not the borrower’s application is grounded under the threat of high fines. The banks also faced certain incompatibilities between the national rules and the relevant EBA guidelines.
All of the above ambiguities, combined with the need to make significant adjustments to the banks’ IT systems, contributed to long approval processes. Consequently, many (particularly corporate borrowers) preferred negotiating private moratoria on a bilateral basis.
Implementing the state’s EUR 2 billion state guarantee scheme appears to have been even more challenging. Under the initial set of rules governing the scheme, it was (among other things) not clear how the banks would be enabled to check when the quota of EUR 2 billion is used up, which is obviously material for loan approval decisions; what was meant by the rule that the guarantee shall not exceed the loan term (which contradicts the essential purpose of a guarantee); and how to apply the unclear requirement that “bank and the state shall sustain losses proportionally and under the same conditions.” Additional uncertainty was created both by the possibility that instead of receiving a guarantee payment in cash the bank would receive state bonds (which from the perspective of prudential requirements may be less beneficial); and by the excessive penalty provisions providing that in case of borrower misrepresentations (which the bank cannot influence) the bank will lose the guarantee and may be required to not only return the benefit, but even to pay default interest on it.
However, deficiencies in the law were not the only hindering factor. According to Slovenian banks, ever since the epidemic the demand for liquidity loans has been objectively low. First, businesses have received several other state incentives, such as subsidies for employees who were temporarily waiting for work, payment of certain social contributions for employees, and so on. Second, companies have been reluctant to incur additional loans, as no matter how cheap, they still need to be repaid. If a company does not know if, when, and how it will be able to compensate for lost orders, its ability to repay is unpredictable as well.
Since the measures were first adopted, Slovenia’s Government has adopted (and corrected) certain implementing regulations, remedying some of the uncertainties. Significant implementation efforts have been rendered by the SID bank (the Slovenian export and development bank which was entrusted with handling the operative tasks on behalf of the State) in cooperation with Ministry of Finance, the Slovenian Banking Association, and the Slovenian banks. Following these developments, the guarantees should generally qualify as CRR-eligible collateral, and, consequently, the state-guarantee-backed loans should become more attractive for Slovenian banks.
It is hoped that the legislative framework concerning the state-backed guarantees is now sufficiently evolved to encourage the banks to support the liquidity of Slovenian businesses and economic recovery, particularly in the event the economic situation deteriorates further due to the second wave of the epidemic.
By Mia Kalas, Partner, Selih & Partners