The process of granting and monitoring credit
Non-performing loans are in part attributable to inadequate lending decisions.
In some cases distorted incentive mechanisms have been observed, which tied the variable part of remuneration to the achievement of targets of mere loan growth. In other cases the lending phase suffered from an inadequate system of delegated powers, in which the powers to grant new loans, including for significant amounts, were widely distributed across the commercial network; this was to the detriment of the quality of the credit assessment and made the control activity very complex. Finally, it was observed that, in the absence of a careful assessment of lending to undercapitalised construction firms, repayment was in effect made conditional on an increase in the value of the real estate portfolio.
Intermediaries must pay the utmost attention to correctly defining the mechanisms for distributing decision-making powers, striking the right balance between control requirements and speed of response to the customer. At the same time, staff incentive systems must be linked to medium-term, risk-adjusted performance indicators, which guide the commercial network towards a proper balance between the pursuit of returns and the mitigation of the risks assumed.
5. The use of the new rules
Banks must also improve the way positions are monitored, since the timely detection of the first signs of anomaly considerably increases the chances of the debtor returning to performing status. Internal structures responsible for analysing companies’ business and financial plans need to be strengthened, above all in terms of skills. Supervisory inspections have shown that quite a few intermediaries lack the professional expertise needed to examine and “challenge” the validity of companies’ business plans. This is a crucial aspect for performing the allocative function of credit as well as possible and for avoiding support for restructuring plans that are destined to fail, resulting only in an extension of maturities and sometimes an increase in debt exposure.
Among the obstacles intermediaries encounter in managing non-performing loans, the slowness of recovery procedures, as I have already noted, carries significant weight. The Italian authorities, aware of this weakness in our legal system, have over the last two years approved legislative changes capable of speeding up loan recovery times. It is important that these measures be given time to take effect.
In summary, they include:
i) procedural measures aimed at reducing the duration of enforcement and insolvency proceedings and at facilitating the restructuring of corporate debt;
ii) substantive measures aimed at promoting out-of-court recovery of loans (the “patto marciano”, or marciano pact, for businesses and consumers);
iii) instrumental measures to increase the effectiveness of recoveries and the development of the NPL market (Public Sales Portal, Register of procedures aimed at improving the functioning of the courts. There are in fact clear signs that part of the problem of the slowness of proceedings does not depend on the legislative framework: Italian courts show considerable heterogeneity in the duration of bankruptcy and insolvency proceedings. Anecdotal evidence suggests that the price of a property securing a non-performing loan can vary significantly depending on the court handling the procedure, even within the same region. This problem should be resolved through targeted measures to reduce and standardise the duration of proceedings across the various courts. Organisational measures to promote the specialisation of judges (especially in insolvency matters) would be of particular importance. Such measures should form part of a reform establishing specialised sections throughout the country, also making use of forms of centralisation for the most complex proceedings.
Pending structural measures, it must be acknowledged that the effectiveness of some of the measures already introduced also depends on the extent to which banks use them. The new rules have in fact made important tools available to intermediaries for the management of non-performing loans. Out-of-court settlements are now easier than in the past; the judicial auction mechanism has been significantly streamlined. The so-called “patto marciano” for businesses can also be used in relation to existing contracts and can therefore affect the stock of non-performing loans. The Ministry of Economy and Finance is working to clarify the interpretative questions raised by the banking and industrial sectors. It is important that these efforts continue.
Intermediaries need to step up their efforts to exploit the potential of the new tools. In some cases this means revising traditional operating methods and acquiring new professional skills capable of deciding whether to take ownership of the property rather than wait for the normal course of recovery proceedings. It is also important to play a proactive role in auctions of properties received as collateral, so as to promote transparency of sale prices and the widest possible participation of potential buyers.
The resistance and fears that are hindering the use of the new tools must be overcome. Acquiring the collateral should not be seen as a form of penalisation of the borrowing companies, but as a way of maximising the value of the property in the interest of both parties.
6. Necessary adjustments in the banking system
The changed competitive environment requires action aimed at maintaining adequate profitability, containing costs and, in some cases, rethinking the business model. The situation of Italian intermediaries is heterogeneous. The majority continue to support the economy and to make profits; some have launched downsizing and relaunch measures that now allow a degree of optimism about the future.
There are then more complex cases, where the negative consequences of the economic cycle have been compounded by those arising from wrong managerial choices, delays in adopting corrective measures and fraudulent conduct. These intermediaries must take extraordinary measures. The restoration of adequate profitability must be pursued with all the levers available, to be integrated within suitable restructuring plans. A precondition for the success of any plan is the involvement and active participation of the entire company workforce.
Workers’ associations can play a decisive role in these situations. When a company is in difficulty it may in fact be necessary to make hard choices on pay and employment levels. Workers’ associations can contribute to defining the relaunch plan, in the awareness that only a company in economic and financial balance can support the local economy and guarantee the preservation of employment levels. Above all, they can help make workers an active part of the relaunch. A resolution of the board of directors is not enough to guarantee the success of a plan. As many examples, including outside the banking sector, show, the chances of success of such plans are high only if workers perceive the objective nature of the difficulties, share the chosen strategies and implement them with the utmost commitment.
8. Conclusions
The Italian banking system, like the European one, is going through a phase of profound change driven by the development of digital channels and by competition from new operators, which in many cases require a rethinking of the business model.
For Italy, overcoming this phase is made more complex by the high level of non-performing loans, largely dependent on structural factors typical of our country. Resolving this problem takes time, but it must be tackled decisively and by deploying all the tools available.
On the regulatory front and in the functioning of the courts, it is appropriate to complete the important measures already adopted in recent years to shorten the duration of proceedings substantially, whose slowness continues to be a significant competitive disadvantage for our intermediaries.
At the same time, banks must raise the quality of their organisational structures in relation both to recovery processes and to all the other phases of lending, revising operating methods, acquiring new professional skills and exploiting the potential of the new tools introduced into the legal system. These are results within the reach of the banking system, but they must be pursued with determination and promptness. The most critical situations of intermediaries are also the consequence of wrong managerial choices and shortcomings in credit processes, which have accentuated the negative effects of the economic recession. In such situations radical measures are needed, with relaunch plans firmly supported by the whole company structure.
Workers’ associations can make a decisive contribution to the success of relaunch plans and, more generally, to overcoming this difficult phase of the Italian and European banking system.
Source:
http://www.dirittobancario.it/sites/default/files/allegati/intervento_barbagallo_6_giugno_2017.pdf
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