Open Review of Management, Banking and Finance

«They say things are happening at the border, but nobody knows which border» (Mark Strand)

Slowing down the progress of bad debt

by Patrizio Messina

Abstract: Careful analysis of this report is the Greek NPL legislation (Law No. 4354), recently subject to major legislative and regulatory reforms, aimed at facilitating the reduction of the large stock of NPLs held. The objective of the legislation is to create a secondary market for Greek impaired loans. The issue of NPLs in Greece was already addressed in detail in the context of the financial assistance programme entered into with the ESM in August 2015.

Summary: 1. Introduction. – 2. Legislative measures. – 3. Purchase and management of NPLs under the law. NPL Servicers and NPL purchasers. – 4. Recent developments.

1. On February 6 2017, the executive board of the IMF completed the article IV consultation with Greece. The IMF stated in its staff report that Greece has reached important goals in settling political and economic imbalances during the past years. However, progress is still too slow and investment risks remain high. While the new European stability mechanism (ESM) supported programme has helped stabilise the economic situation, the underlying issues hindering the recovery have not yet been fully addressed.

In particular, the IMF called for decisive action in repairing bank and private sector balance sheets, returning to sustainable credit growth, and expressed concern that without reducing non-performing loans (NPLs)[1] rapidly, banks would not be able to provide new lending to viable firms, hence slowing down the recovery.

2. As part of the deliverables under the ESM programme, the Greek Parliament introduced Law 4354 which entered into force on December 16 2015 (as subsequently amended, the NPL law), which set forth new rules for the sale and management of NPLs[2].

Subsequent amendments to the NPL law introduced in 2016 broadened its scope, extending its application to various types of loans (law 4393/2016), and introducing provisions for the tax treatment of the management and sale of the loans (law 4389/2016).

Furthermore, the Bank of Greece (BoG) issued implementing provisions to the NPL law with the executive committee Act (ECA 82/2016, as further amended, the BoG act), which specifies the licensing and regulatory regime for non-bank servicers and companies that are acquiring NPLs[3].

The NPL law framework aims to create a secondary market for NPLs in Greece. In particular, the NPL law sets forth requirements for the establishment and operation of companies purchasing NPLs and servicing companies managing the loans. The BoG supervises and regulates the activities, as the competent licensing authority under the NPL law[4].

3. NPLs are usually managed internally by the banks through dedicated units. This strategy has been ineffective in increasing the recovery of the NPLs. Therefore, the transfer of NPL portfolios to special purpose entities and external management of these NPLs has become a pillar of the NPL law. Two types of companies are deemed to be eligible to undertake the activity of, respectively, acquiring and servicing NPLs, which was previously limited to banks and financial institutions: an asset acquisition companies (AAC or purchaser), and an asset management company (AMC or servicer).

Companies that intend to act as servicers of NPLs under the NPL law must satisfy the main following requirements:

be established either in Greece (under the legal form of société anonyme), with the sole purpose of servicing loans, or in another European economic area (EEA) member state and operating in Greece through a branch that has as its purpose the servicing of loans; have registered shares, and a minimum share capital of €100,000 ($106,521); and be listed in the general commercial registry.

Furthermore, servicers need to acquire a special operating license granted by the BoG. The specific provisions and requirements for the licensing procedure are set forth in the NPL law and in the BoG executive committee act of 95/2016 (which replaced BoG act 82/2016), which sets forth the supporting documents that the prospective servicer must submit to the BoG. These include inter alia, extensive disclosure of information regarding the company, its beneficial owners and the company’s directors and managers; the company’s organisational structure; and a business plan presenting the company’s strategy. Approval is granted by the BoG upon satisfactory evidence of the company’s capability and suitability to carry out the strategy.

The NPL law does not include particular licencing requirements for companies intending to purchase NPLs. An AAC must satisfy the following basic requirements: a company must be established either in Greece as a Greek company under the form of a société anonyme, or as a company established in another EEA member state, operating through a subsidiary, having as business purpose the acquisition of loans[5]; and such a company must have signed a loan servicing agreement with a servicer legally licenced and supervised by the BoG.

Furthermore, the offer of sale for NPLs (with certain exceptions) is conditional upon the delivery of a notice to the relevant debtor and any guarantor to settle their debts at least 12 months prior to the sale. The sale of the claims must also be registered in a public registry and is effective upon registration, and notified to the relevant debtors. The position of the debtor should not be worsened due to the servicing or transfer of the loan.

4. In December 2016, in order to provide further impetus for the implementation of the NPL law, the Greek parliament introduced extensive amendments to the bankruptcy code, in order to facilitate, inter alia, pre-bankruptcy arrangements with creditors[6].

According to the IMF staff report, ‘without reducing NPLs rapidly, banks will not be able to provide new lending to vibrant firms, putting the recovery in jeopardy’. Therefore, the IMF has called for the BoG, together with the single supervisory mechanism, to set ambitious NPL targets and monitor banks’ strategies and performance against these targets. On the other hand, as with other countries where the NPL stock is significant, an effective reform process of the enforcement system is an important incentive for the purchase and recovery of NPLs. Therefore, in order to be able to develop an effective secondary NPL market, the reform process should continue in Greece, introducing other measures, such as out-of-court debt restructuring and the full implementation of the insolvency and debt enforcement framework.

Patrizio Messina is lecturer at LUISS Business School in Legal aspects of international Business & Finance


[1] European Central Bank, p. 2,

[2] European Banking Authority, “Eba report on the dynamics and drivers of non-performing exposures in the UE banking sector”, 22 July 2016, 8. M. Minenna, “Il problema dei crediti deteriorati italiani e l’ Europa”, in Social Europe, 30 September 2016, 1. B. Bruno, I. Marino, Milano, June 2016, 2. L. G. Ciavoliello, F. Ciocchetta, F. M. Conti, I. Guida, A. Rendina, G. Santini, “Quanto valgono i crediti deteriorati?”, in Note di Stabilità Finanziaria e Vigilanza, Banca d’Italia, 2016. I. Ferraro, “Sui crediti deteriorati vanno superate le penalizzazioni: a colloquio con Pier Carlo Padoan”, in Bancaria, 2015, no. 4, p. 91.

[3] E. Norden, L., Buston, C. S. & Wagner, W., 2014, “Financial Innovation and Bank Behavior: Evidence from Credit Markets”, in ‘Journal of Economic Dynamics and Control’, 43(C), 130–145.

[5] L. G. Ciavoliello, F. Ciocchetta, F. M. Conti, I. Guida, A. Rendina, G. Santini, “Quanto valgono i crediti deteriorati?”, in Note di Stabilità Finanziaria e Vigilanza, Banca d’Italia, 2016. I. Ferraro, “Sui crediti deteriorati vanno superate le penalizzazioni: a colloquio con Pier Carlo Padoan”, in Bancaria, 2015, no. 4, p. 93.

[6] For more information please read:


This entry was posted on 23/02/2017 by in Finance.
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