PORTFOLIO GUARANTEES MEASURES AS REGARDS COVID-19 EPIDEMICS
01 April 2020
By Decision No. 215 of 27.03.2020, the Council of Ministers (CM) approved the state to increase its share in the capital of Bulgarian Development Bank AD (BDB) through monetary contributions in the total amount of up to BGN 700 000 000.
The capital increase will be carried out in stages for the implementation of the economic support measures in connection with the COVID-19 epidemic. Тhe specific amount of each capital increase is to be determined by the Minister of Economy consistent with the needs and following a reasoned proposal by the BDB
The increase of BDB’s capital is aimed at use of these funds to issue portfolio guarantees by BDB to commercial banks for the implementation of specific economic support measures as regards COVID-19 epidemic.
What are portfolio guarantees?
The nature of portfolio guarantees is that BDB will provide a guarantee scheme on the portfolios of loans which commercial banks will form in order to be secured for the granting of the loans to their clients. This aims to mitigate the credit risk of the bank concerned, with the BDB bearing a large part of it for debtors who are in difficulty to pay their loan obligations. The specific parameters of the risk distribution, the procedure and terms of claiming the rights under the guarantees and the final mechanism of the measure application may be discussed after the negotiation of the terms between BDB and commercial banks is finalized.
The purpose of such instruments is to guarantee non-performing loans. According to the BDB, the maximum effect expected is that commercial banks could form a portfolio of BGN 2 billion in loans under this measure.
Who can benefit from the measures?
- BGN 500 million of the envisaged monetary contribution is intended to be used by BDB for issuing portfolio guarantees to commercial banks, which will enable them to provide more flexible business loan terms and conditions for a certain period. No official information has been released yet as to whether the guarantees provided by BDB to commercial banks will be for already granted existing loans or for new ones. It is expected for both existing and new loans to be included. It is not yet known what type of loans this guarantee will cover – those for working capital or for other types of loans.
- BGN 200 million from the resource provided by the state to BDB will be directed to natural persons on unpaid leave as a result of the pandemic situation. They will be able to take an interest-free loan of up to BGN 1500. The original idea was that BDB would transfer the amount directly to commercial banks.
When will the measure be implemented?
A notification has been sent to the European Commission by the Minister of Finance in accordance with Art. 108, Para 3 of the Treaty on the Functioning of the European Union (TFEU), so that the EC can deliver its opinion on the granting of aid and whether such a plan is compatible with the internal market within the meaning of the TFEU.
Next, it is necessary to convene a General Meeting to decide on the increase of the BDB’s capital, as well as to register the increase in the Commercial Register.
Following the implementation of these mandatory steps, it is expected that BDB will publicly announce all the criteria and terms for the announced measures to be implemented. The guarantees will be issued by the National Guarantee Fund, which is a subsidiary of BDB.
Will all commercial banks participate in the implementation of the measures?
It has not been clarified whether the amount will be distributed among all banks or only among specific ones, as the position of the Association of Commercial Banks is still expected. The decisions on lending under this extraordinary program will also depend on the commercial banks, and the relations between them and the BDB should be negotiated and executed in a contractual manner.
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