Italy’s bad loan proposal risks damaging crucial market, senior banker says

MILAN (Reuters) – A law proposed by the Italian prime minister’s party to help those in arrears risks damaging the country’s non-performing loan (NPL) market, which played a crucial role in helping banks offload sour debt, a senior banker active in the sector said on Friday.

A proposal from Giorgia Meloni’s Brothers of Italy targets loans with a value of up to 25 million euros ($27 million) that banks classed as impaired between 2015 and 2018, and then proceeded to sell as part of a portfolio, or via a securitisation, by the end of 2022.

It aims to give borrowers the right to repay the original loan at a price equivalent to the ratio between the loan’s gross nominal value and the average portfolio price, plus a 20% premium.

“The proposed scheme gives borrowers an unexpected advantage which risks undermining the national NPLs market, an infrastructure which I deem as strategic for the country”, Giovanni Bossi, Chief Executive of Cherry Bank, which is an investor in non-performing loans, told Reuters.

Such a rule would provide a 20% return for the loan’s seller, but against a price that is an average of the loan pool when the value of individual loans within a portfolio can vary significantly.

It would also give borrowers the option of stopping repaying loans because they know that European Central Bank rules force banks to offload bad loans to avoid having to provision them in full.

The measure would give borrowers the chance to cancel the debt once it has been sold, spending less than the cost of repaying its original value.

Bossi said the measure could prompt foreign operators active in the sector to shift their focus from the Italian market.

“This would be a damage for banks because it would reduce demand for their soured debt”, the banker said.

“We should keep in mind that Italian banks are now sound because the NPLs market helped the system offload some 350 billion euros of debts which went soured”, he added.

($1 = 0.9237 euros)

(Reporting by Elvira Pollina; Editing by David Holmes)