Relief for victims of war: What benefits does the loan restructuring bill provide to borrowers?
And when a creditor can refuse a debtor
On 11 April, the Verkhovna Rada adopted two draft laws in the first reading to ease the credit burden for borrowers who found themselves in the war zone, temporarily occupied territory or granted the status of internally displaced persons. These are Bill No. 9051 that sets out a mechanism for restructuring consumer loans, and Bill No. 9052, providing tax benefits in case of their restructuring.
"They (the bills – Mind) concern people who have consumer loan agreements and whose place of permanent residence/abandoned place of permanent residence is the territory where military operations are being (were) conducted, or the territory temporarily occupied by russia," commented Yaroslav Zhelezniak, MP from the Golos party.
Mind has been looking into what the restructuring of consumer loans will look like and who will be eligible for it.
What benefits have MPs granted to borrowers since 24 February 2022? These two draft laws are not the first to make life easier for borrowers under martial law.
- In March 2022, the Verkhovna Rada passed Bill No. 7137-d (Law No. 2120-IX), which exempted individuals from the obligation to pay a forfeit (fine, penalty) and other penalty payments stipulated in the loan agreement during martial law, and prohibited financial institutions from increasing the interest rate on loans in case of late payments.
- In July 2022, the Parliament passed Bill No. 7414 (Law No. 2459-IX). It prohibits the collecting of overdue loans from military personnel and their families during martial law and for six months after its cancellation.
- In December 2022, MPs passed Draft Law No. 7441-1 (Law No. 2823-IX). It allows borrowers to refuse to repay car and real estate loans, up to debt cancellation, if the property is damaged or destroyed as a result of hostilities or is located in a temporarily occupied territory.
The aforementioned bills No. 9501 and 9502 were registered in February 2023. They were initiated by the Cabinet of Ministers. Therefore, there is no doubt that the parliament will support both documents in the second reading.
Who can get a consumer loan restructuring? Draft Law 9501 stipulates that while martial law is in force in Ukraine and within 30 days after its cancellation, borrowers' debts on consumer loans (unsecured loans) are subject to mandatory restructuring if requested by the debtor. The date of issue of such a loan does not matter. Thus, even before the introduction of martial law, and even after.
Moreover, the text of the draft law contains the phrase "loan agreements with financial institutions". It means that both banks and financial companies that also issue consumer loans are obliged to provide restructuring.
Several conditions must be met for restructuring to occur:
- the borrower's place of permanent residence or the place he or she has been forced to leave is a territory where hostilities are underway or a territory that has come under temporary occupation;
- the borrower must have an overdue consumer loan. It applies only to debts formed after 24 February 2022. Thus, 'old' debts are not eligible for restructuring;
- the borrower is unemployed – their source of income can only be social assistance, pension, charitable assistance – or the borrower or their family member is a war veteran, and the debtor's total income does not exceed two minimum wages per month (UAH 13,400 at the moment).
How to apply for a loan restructuring? To obtain a loan restructuring, the borrower should apply to the lender with an application. The application should contain the full name of the lender, the date of the loan agreement, and information about the registered place of residence.
In addition, the application must be accompanied by a certificate of registration of a temporarily displaced person, documents confirming the income of the borrower and his family or the debtor's disability. If these documents are not available, the lender has the full right to refuse to restructure.
Loans that are not eligible for restructuring are:
- loans that have already undergone the restructuring procedure before the entry into force of draft law No. 9051;
- intended for the purchase of real estate or vehicles that are pledged as collateral for such loans;
- those the real interest rate on which is lower than the NBU key policy rate effective on the day Bill No. 9051 came into force, increased by 5 pp (currently 30%).
What happens if the creditor agrees to restructure? After a successful restructuring, the borrower takes on the following obligations.
First, to repay the loan principal starting 30 days after the lender agrees to the restructuring and for three years or until the end of the loan agreement if it is longer than three years.
Second, within six months after the cancellation of martial law, repay the interest on the loan accrued before the restructuring. In this case, the maximum loan rate cannot exceed the value specified above – the NBU key policy rate + 5 pp.
All other borrower's obligations that were formed in the period from 24 February 2022 to the day of the restructuring are considered cancelled. The lender is prohibited from increasing the amount of debt in the amount of overdue interest obligations and charging penalties to the client.
"With this draft law, we plan to comprehensively solve the problem of charging excessive and disproportionately high interest on consumer loans," Danylo Hetmantsev, Chairman of the Parliamentary Committee on Finance, Taxation, and Customs Policy, says.
Tax consequences of restructuring. The second draft of law No. 9052 is as concise as possible and contains essentially one provision. It stipulates that the amount by which the credit debt of an individual debtor is reduced as a result of the restructuring of a consumer loan is not included in the total monthly (annual) taxable income calculation.
Accordingly, the part of the borrower’s debt that the lender has 'remittеd' is not subject to taxation.
Consequences for the financial market. As early as April 2022, the NBU sent a letter to banks and non-bank financial institutions urging them to more actively offer consumer loan restructuring or loan repayment holidays to individual clients.
However, as there was no specific law obliging lenders to restructure, the NBU's appeal was more of a recommendation. That is why banks and financial companies were in no hurry to grant loan repayment holidays to borrowers. It is to be expected, as consumer loan rates are as high as 80-100% per annum. And it is logical that financial institutions do not want to lose such earnings. Now they will have to comply with the law and meet borrowers halfway.
However, this is unlikely to have a major impact on the financial market. And here's why. As of 1 March 2023, the share of retail loans in the loan portfolio of banks was 20%. The rest are business loans.
It is the corporate portfolio that banks have the most problems with – the borrowing companies went bankrupt, collateral destroyed, etc. Given the provisions they have made and continue to make (UAH 119 billion in 2022 and about UAH 5 billion in January-February 2023), the restructuring of retail loans will not have much impact on the situation.
Financial companies will not suffer losses either. Despite the war and the crisis, they began to increase their loan issuance in the third quarter of 2022. While in the second quarter of 2022, financial companies issued about UAH 1.3 billion in loans to individuals, in the third quarter it was about UAH 5 billion, and in the fourth quarter it was more than UAH 6 billion. Thus, the new loans will definitely help non-bank lenders to cover the loss of at least part of their income due to restructuring.
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