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New Emergency Ordinance Institutes a Grace Period of up to 9 Months in the Context of COVID-19 Pandemic

31 March 2020

The Romanian Government approved the governmental emergency ordinance no. 37 dated 30 March 2020 (“GEO 37/2020”) introducing a payment suspension for credit instalments, upon debtor’s request, for a period of up to 9 months. Banks and non-banking financial institutions are obliged to apply the new rules to the benefit of both individuals and companies in the context of the new coronavirus (“COVID-19”) pandemic.

The provisions of GEO 37/2020 shall be further regulated by a set of detailed rules regarding the implementation of the new piece of legislation which is scheduled to be issued in the next 15 days.

Many banks have already declared themselves ready to grant a certain payment suspension to certain customers which have been affected by the COVID-19 crisis. The National Bank of Romania (“NBR”) had issued last week a press release with respect to a series of clarifications regarding the applicability and interpretation of certain financial regulations applicable to credit and non-banking financial institutions, stating that any payment deferral due to the COVID-19 pandemic, either legal or contractual, shall not be qualified as a loan restructuring and does not imply any additional provisions on the lender’s side.

However, GEO 37/2020 mandates the application of the grace period for a longer period (i.e., up to 9 months) to any person which meets the general legal criteria, while also regulating certain issues which are in connection with a payment deferral. The two banking associations, ARB and CPBR, have issued a joint press release stating that the banking system should be allowed to focus its effort towards supporting clients in need, rather than directing funds to others.

1. Key aspects of GEO 37/2020

1.1. Who will benefit from a payment suspension?

GEO 37/2020 will be applicable, upon request, to individuals, freelancers and companies, whose income has been directly or indirectly affected by the COVID-19 pandemic.

The reference to an affected income gives the banks the possibility to make a case-by-case analysis of the actual situation of the debtor. However, it may be expected that clarifications might be brought under subsequent rules regarding the implementation of GEO 37/2020.

Companies may obtain a payment suspension if the following cumulative requirements are met:

i)the company is not subject to insolvency proceedings; and

i)the company has ceased, in whole or in part, its business activity following measures enforced by the authorities to contain the spread of the virus and has an emergency status certificate, issued based on its affidavit, ascertaining that (a) its profits have decreased in March 2020 with 25% in comparison to the average registered for January and February 2020 or (b) the company has been subject to a total or partial business cessation due to the measures enforced by the authorities to contain the spread of COVID-19.

The borrowers of all kind may not benefit from the moratorium if their credit facilities had been accelerated or if they register payment delays that shall be unsettled before making the suspension request. Therefore, accelerated loans or borrowers that are subject to enforcement proceedings will not benefit from the legal moratorium.

1.2. What is the payment suspension period?

The payment suspension can be granted for a period of up to 9 months, but no later than 31 December 2020. However, the borrowers can opt for a shorter period depending on the severity of their financial difficulties.

1.3. How can one obtain a payment suspension?

The payment suspension shall be given upon a request made in writing, by telephone (registered conversation) or other electronic means of communication, and will not require an addendum to the loan agreement to be executed by the parties. However, in case of approval, the lenders are required to inform the borrowers within 30 days since the request for suspension is made about the provisions of the credit agreements which are amended by law, under GEO 37/2020, following the payment suspension.

The lenders will analyse the suspension request following a procedure which will be included in the detailed rules for the implementation of GEO 37/2020, in order to determine whether the borrower meets the general criteria for approval.

1.4. When can a payment suspension request be made?

The request to benefit from a payment suspension can be made within 45 days since the entry into force of GEO 37/2020 (i.e., starting with 30 March 2020). After this deadline expires, borrowers can no longer apply.

1.5. What type of loans can be suspended?

According to the provisions of GEO 37/2020, the payment suspension will be applicable to all types of loans granted by banks and non-banking financial institutions, including leasing agreements.

1.6. How will the payment suspension affect the reimbursement of the loan?

All amounts owed to the lenders based on the credit agreements shall be suspended (i.e., principal, interest and other costs).

With some exceptions, the contractual period shall be automatically extended with the duration of the suspension period.

1.7. What happens to the interest during the suspension period?

The interest associated with the loan will continue to be calculated by the bank during the suspension but shall be capitalized and included in the principal amount to be repaid by the borrower after the suspension ends.

As an exception from the above rule, in case of mortgage loans granted to individuals, the interest accumulated during the suspension of mortgage loans shall be determined as a separate and independent amount, based on the provisions of the credit agreement, and shall be repaid in 60 equal monthly instalments which are not subject to any interest. The repayment of such interest accumulated during the payment suspension period shall be guaranteed 100% by the Ministry of Public Finance, through F.N.G.C.I.M.M. While this state guarantee is welcomed, it needs to be considered that the amounts effectively paid would become a fiscal receivable and it may influence further enforcement proceedings.

2. Reactions to GEO 37/2020

A slightly diff erent version of GEO 37/2020 was initially adopted on 26 March 2020 by the Romanian Government which caused some consumer protection associations to argue that the solution to capitalize the interest to the principal amount was beneficial only to banks and did not favour the borrowers. Also, in the initial form, the suspension request could be submitted only during the state of emergency (i.e., 16 April) and not within 45 days since the entry into force of GEO 37/2020 as is regulated in the current version. Such issues determined the Romanian Government to delay the entry into force of the initial version in order to clarify certain aspects.

In addition, the Romanian Association of Banks issued a press release urging the Romanian Government to carefully consider that a legislation granting a generalized legal moratorium would have a significant impact over the stability and liquidity of the banking system. It has been recommended that each payment suspension request be thoroughly analysed on a case-by-case basis by the banks and implemented along with additional remedies, in order to assure that such a benefit is granted only to those truly incapable of performing their payment obligations due to the effects of the COVID-19 pandemic, and not just to anyone.

It remains to the determined whether the Romanian Association of Banks’ recommendations shall be taken into account given that the provisions of GEO 37/2020 shall be further regulated by a set of rules regarding the implementation of GEO 37/2020 which is scheduled to be issued in the next 15 days.

3. NBR’s measures regulations in view of the COVID-19 pandemic

NBR’s measures were aimed at preparing the scene for the entry into force of GEO 37/2020, allowing the banking system to implement practical solutions for individuals and companies seeking financial relief during these troubled economical times without triggering additional financial burdens for lenders.

3.1. NBR’s measures regarding credit institutions:

a)Following a general legal measure or through direct negotiations, any deferred payment determined by a situation generated by the COVID-19 pandemic should not be associated with the borrower’s financial difficulty. Consequently, the loan shall not be reclassified, and the banking institution should not make additional provisions as a result of the restructuring.

b)Permission for banks to temporarily utilize their already existing capital buffers, while observing the requirements provided by the legal framework, in order to maintain their supporting role in the current context of the economy.

c)Permission for banks to temporarily not comply with the minimum level of liquidity, with the purpose of using their liquidity reserves to cope with increased liquidity demand from the population during a crisis.

d)In case a credit institution agrees to a payment deferral, on an individual basis which is not linked to a situation generated by the COVID-19 pandemic, such an operation should be classified as a loan restructuring.

e)Credit institutions must continually assess all of their credit exposures in order to identify any non-payment risk factors.

f)NBR will continue to evaluate the situation of each bank and, depending on the evolution of the impact generated by the COVID-19 pandemic, will take any necessary measures.

3.2. NBR’s measures regarding non-banking financial institutions:

a)Confirmation that the restructuring of loans granted to individuals and companies adversely affected by the COVID-19 pandemic, by way of payment deferral for a specific period does not automatically trigger any requirements to create additional credit risk provisions.

b)Confirmation that with respect to non-banking financial institutions registered in the Special Register, which are subject to additional prudential requirements regarding credit restructuring, that the loan restructurings granted to individuals or companies adversely affected by the COVID-19 pandemic do not trigger the automatic classification of such loans in a lower category of credit risk, thus no additional provisioning requirements shall apply.

c)Permission to temporarily not comply with the mandatory limits regarding credit exposures, provided that the non-compliance is due to the implementation of measures aimed to support the borrowers or to stimulate crediting in the context of the COVID-19 pandemic. Failure to observe the mandatory requirements in the given context shall be notified by the non-banking financial institutions to NBR for approval and a remedy period shall be granted in order for the lender to realign with the credit exposure limits provided by the law.