Hungary's national bank releases circular on outstanding loans under legislative moratoria

Hungary

The Hungarian National Bank (MNB) has issued its updated management circular for the treatment of outstanding loans affected by legislative moratoria.

In line with the European Banking Authority (EBA) position, the MNB states that it not necessary to automatically qualify a customer loan as being defaulted or restructured (and thus the creation of higher provisions is not necessary) if the loan fell under the Hungarian legislative moratoria for up to nine months prior to the expiry date of the second moratorium on 30 June 2021.

On 30 June 2021, if a loan has been subject to the legislative moratoria for more than nine months, it can be assumed that the borrower has or is expected to have financial difficulties complying with payment obligations. However, financial institutions may refrain from re-qualifying such loans as restructured if it can be proven without a doubt that the borrowers do not have nor are expected to have financial difficulties.

In respect to retail borrowers, the MNB issued the following specifications on evaluating the financial position of borrowers:

  • Has the monthly net income of the borrower credited on the borrower's account and held with the lender not decreased more than 15% during the two months prior to the qualification in relation to the average net income of the borrower in February and March 2020? or
  • If no income is credited on the account, has the borrower provided a certificate from his employer that no such decrease in income has happened as mentioned in the previous point? or
  • In respect to the borrower's account that is held with the lender, is the higher requirement of a minimum account turnover or credits undertaken in the bank account agreement or the loan agreement being complied with? or
  • Does the savings of the borrower available to the borrower at the time of qualification satisfy at least one year debt service for all exposures of the lender’s group?

The classification of a loan as restructured may be terminated after a six-month monitoring period following the expiry of the moratoria if the retail borrower did not have a payment default of more than 30 days, and his overdue debt during the monitoring period did not exceed the equivalent of EUR 100 (assuming that no other reason occurred for requalification). Any provisions created on this basis can be released.

In respect to corporate borrowers, the methods for evaluating the financial position of a borrower are not limited. Institutions can employ ordinary or extraordinary procedures to evaluate the financial position of borrowers. Restructuring does not have to be viewed as an indication of default if the loan is subject to the legislative moratoria for more than nine months and the decrease of the outstanding debt exceeds the 1% threshold (as defined in MNB No. 13/2019) solely as a result of the moratoria (and assuming that no other reason occurred for requalification).

The MNB also states that because the pandemic has resulted in institutions lacking the necessary information for evaluating credit-risk increases on a bottom-up basis and for recalibrating value-loss models, these institutions should adjust the models and apply management corrections at the portfolio level. These overlays will result in a single sum expected loss value, which the institution will determine on the basis of those risk factors that may not be fully covered by the applied model, but will lead the institution to the opinion that risk is significant.

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