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Bank Holiday in Times of COVID-19 (Coronavirus) Pandemic Crisis | IY Law Firm
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Bank Holiday in Times of COVID-19 (Coronavirus) Pandemic Crisis

11.04.2020

Author: Doychin Ivanov, attorney-at-law

On 10.04.2020, the Bulgarian National Bank published on its website an announcement on the deferred and debt settlement rules (the “Rules”) adopted by the banks in Bulgaria in connection with the crisis caused by the outbreak of COVID-19 (coronavirus). These Rules have been developed within the Association of Banks in Bulgaria, approved by the Management Board of the Bulgarian National Bank and follow the Guidelines already given by the European Banking Authority.

In general, the Rules aim to provide borrowers with an opportunity not to repay their monthly installments to banks due to the unprecedented crisis of the COVID-19 (coronavirus) pandemic. This decision was eagerly anticipated by the business and the citizens and gained popularity as a bank holiday or bank moratorium.

I. What do the Rules provide for?

The Rules provide for three mechanisms for deferring and settling outstanding debts to banks and their subsidiaries – financial institutions for a period of up to 6 months, but no later than 31.12.2020 (the “Grace Period“)

Mechanism No. 1 –

deferring of principal

and interest

• The amounts due (principal and interest) are deferred for the Grace Period.

• After the Grace Period expires, a new repayment plan is drawn up for up to 6 months longer than the original one, depending on the number of deferred installments, which includes all the remaining debt (principal and interest), as well as the amount of the deferred principal installments.

• The outstanding interest, which should have been paid during the Grace Period, is distributed evenly to each installment under the new repayment plan and is added thereto.

.

Mechanism No. 2 –

deferring of interest only

• Amounts due only on principal are deferred for the Grace Period.

• During the Grace Period, only the interest due on the effective repayment plan is paid.

• After the Grace Period, a new repayment plan is drawn up for up to 6 months longer than the original one, depending on the number of deferred installments, which includes all the remaining debt (principal and interest), as well as the amount of the deferred principal installments.

Comparison between the conditions under Mechanism No. 1 and Mechanism No. 2

Let’s take the following basic conditions as an example:

  • As of 1st Apr 2020, the borrower has 10 installments remaining until the end of his mortgage repayment plan.
  • Each monthly repayment installment amounts to BGN 600 and includes BGN 500 principal and BGN 100 interest.
  • The maturity of each monthly repayment installment is the 25th of the respective month, i.e. as of 1st Apr 2020 the maturity dates of the outstanding repayment installments are: 25th Apr 2020; 25th May 2020; 25th Jun 2020; 25th Jul 2020; 25th Aug 2020; 25th Sep 2020; 25th Oct 2020; 25th Nov 2020; 25th Dec 2020 and 25th Jan 2021.

The last installment under the pre-crisis repayment plan should have been made by 25th Jan 2021. However, due to the COVID-19 (coronavirus) crisis, the borrower is now having difficulty repaying the loan installments.

Mechanism No. 1

Grace Period of 6 months, i. e. from 1st Apr 2020 until 1st Oct 2020

During the Grace Period the borrower does not repay neither principal, nor interest.

.

After the Grace Period has expired, a new repayment plan is prepared, which provides for an extension of the repayment period of the loan by 6 months, with the last installment already due on 25th Jul 2021, instead of 25th Jan 2021.

To the outstanding debt under the new repayment plan will be added the amounts of the principal from the missed installments during the Grace Period, i. e. 6 x BGN 500 = BGN 3,000, as well as the amounts of the interest from the missed installments during the Grace Period, i. e., 6 x BGN 100 = BGN 600.

Mechanism No. 2

Grace Period of 6 months, i. e. from 1st Apr 2020 until 1st Oct 2020

During the Grace Period the borrower does not repay principal only.

During the Grace Period the borrower continues to repay only interest, i. e. BGN 100 monthly.

After the Grace Period has expired, a new repayment plan is prepared, which provides for an extension of the repayment period of the loan by 6 months, with the last installment already due on 25th Jul 2021, instead of 25th Jan 2021.

To the outstanding debt under the new repayment plan will be added only the amounts of the principal from the missed installments during the Grace Period, i. e. 6 x BGN 500 = BGN 3,000. The interest on the installments for the Grace Period will not be added to the new repayment plan because they were paid on time.

The rules for Mechanism No 1 and Mechanism No. 2 leave some uncertainty as to whether or not the bank will charge new interest for the new 6-month period, which is added to the original repayment plan.

At present, the prevailing opinion is that such interest will be charged due to the basic principle in the bank lending is that time is money and any delayed repayment of debt entails interest.

However, the interest, which was supposed to be paid within the Grace Period, will not be capitalized to the main debt. It will only be collected later than initially expected.

Mechanism No. 3 –

applicable to

revolving products

• Revolving a credit line is allowed, although the installments due or part thereof are not repaid on time. The repayment of the installments is postponed by 6 months, but not later than 31st Dec 2020.

• No minimum amount shall be formed for credit card revolving credit limit, effective no earlier than 1st Feb 2020, for a term of up to 6 months, but no later than 31st Dec 2020. After the Grace Period has expired, the accrual of minimum amount of revolving is restored and the loan is serviced under the original contract.

• For a period of up to 6 months, but no later than 31st Dec 2020, the due monthly interest on an overdraft loan is repaid at the expense of an unused limit or its payment is deferred for a period of up to 6 months after the end of the Grace Period.

II. Who the Rules are applicable to?

The Rules apply to all borrowers – individuals and legal entities (except credit institutions) who have difficulty in servicing their loan payments due to the crisis caused by the COVID-19 (coronavirus) pandemic.

The Rules are applicable to borrowers who have not defaulted on their repayment plans. However, delays in payments of up to 90 days as of 1st Mar 2020 will be considered as acceptable as well.

III. Other conditions for application of the Rules

The Rules are not applied ex officio. The borrowers will have to present to the banks explicit requests for application of the Rules to their loans. The specific form of deferral and settlement of the debt will then be subject to agreement between both parties.

The deadline for submission of requests to the banks for deferral of debt is 22nd June 2020, and the respective bank should have taken its decision by 30th June 2020.

The Grace Period will not exceed 6 months and will not expire later than 31st Dec 2020.

The borrower has the opportunity to cancel the Grace Period granted earlier than foreseen and to request the preparation of a repayment plan.

The proposed deferral and settlement mechanisms apply only to the bank loans arising from contracts concluded before 31st Mar 2020.

The team of Ivanov and Yonkova Law Firm remains at disposal for provision of legal opinion and answers to any supplementary questions regarding the present or any other topic, you may have.

The present article does not represent legal opinion or advice on specific case or situation.

Author: Doychin Ivanov, attorney-at-law

Managing Partner Ivanov and Yonkova Law Firm