Interview | Banks are now selling their bad loans much earlier and more often than before

Mrs. Dimitrova, what is the current average amount of overdue receivables and how has it changed in recent years?

The average amount of purchased receivables among the companies in our association is decreasing. In 2020 it was around 2,500 euros. We now have data for the first half of 2024 and the average is about 625 euros.

Well below 2020. What is the reason?

Most of the loans that are currently being redeemed are no longer bank-owned. Bank loans in our industry’s company portfolios in 2020 amounted to over 50% of the total. Now their share has shrunk to less than 20%. 

Why is that?

Because fast credits and overdue utility and telecom bills have become increasingly widespread, their share is increasing, and bank loans are no longer such a large part of the receivables that we buy. Banks have also made some significant changes. They also saw the potential of the payday loan market. If we look at the top 10 banks in the country by volume of assets, tbi bank is already in the top 10. By the end of the year, it will be in 8th or 9th place. Usually, their fourth financial quarters as well as that of the former BNP Paribas (note - BNP Paribas Personal Finance was acquired in mid-2023 by Postbank) are the strongest, because they mostly offer consumer loans with low credit amounts.

These banks have changed the market, and they are not the only ones - other banks are also looking in this direction. Postbank with their products were looking in this direction even before they acquired BNP Paribas. DSK has had so-called point-of-sale points in large retail outlets for many years. That is, they also seek to be close to the customer. 

As such, things have changed with the banks. They continue to offer large consumer credit exposures of 40-50 thousand euros without collateral. Their mortgages have also skyrocketed in recent years. The mortgages are not currently sold to us because they have not yet fallen into arrears and what we buy are the smaller consumer loans, which in turn changes the structure of our receivables.

And do you expect the current credit boom to lead to more mortgage or consumer loan defaults?

Let's make a comparison with 2008 and how it was different, as we once again talk about a mortgage boom. Back then the focus of assessment was the property itself. What is different now is that it is not so much the property that is evaluated as the borrower. Things like having collateral to pledge to the bank are more important now, as well as the individual’s credit risk. Of course, when banks have a mortgage, they are significantly more secure as a lender.

The other thing is that, despite the growth of mortgage loans, there is currently a very large increase in bank deposits. That is, our banking system is currently extremely stable, and the banks are extremely liquid. As such, I do not expect a large increase in interest rates on mortgages, simply because banks have deposits - an extremely cheap resource for them. I don't think 2008 will happen again.

There is also another thing – Bulgaria sits on the threshold of the Eurozone, which means that the European Central Bank also plays an important role in the regulation of the country’s commercial banks. Accordingly, there will be no bank failures or deterioration of their credit exposure. For me, banks are currently stable, they want to grow not just by charging fees, as has been proclaimed everywhere, but also from their main function – lending money.

What is the volume of your transactions with the banks annually and how does this fluctuate?

There is a big change in the structure between cases that are assigned to us for collection (note - the debt is owned by credit purchasers, the agency only collects it in their name), and cases that we buy out (note - the debt is owned by the agency). Years ago, we had many more assigned cases as a nominal value. In 2020, the assigned debt for collection from household consumers was worth 370 million euros. For the first half of 2024, it was 19.5 million euros.

On the other side is the purchased debt, which on an annual basis is a little over a quarter of a billion euros. That's the amount for the last 5 years. This is the balance that banks sell annually, and it does not change.

What is the reason behind the changes?

Debt sales are declining for several reasons. First, banks prefer to sell at an earlier stage. But the degree of indebtedness is not as large as before, because the structure of the purchased debt does not change - it is not that one indicator increases at the expense of the other. Simply speaking, what decreases is the overall debt that we acquire, together with the non-performing loans (NPL) in general in the country. For the first half of 2024, NPL levels are at a record low of 1.9%.

Some of the banks have also created their own internal departments to collect their bad debts. Another trend is that some of them have started to sell regular assignments at a very early stage. They sign a framework contract and every month they transfer a portfolio of overdue receivables that meet certain characteristics.

Is this what's been done in recent years?

This has been done more and more often in recent years by both banks and quick loan companies.

Do most banks already operate this way?

I wouldn't say most, but for the larger ones, it's starting to become a trend. Previously, there used to be megadeals for the sale of debt portfolios to the value of 150 million euros. Over time, the banks "cleaned up" their balance sheets and now their portfolios are significantly better performing. In order to meet the ECB's requirement for non-performing loans of up to 5%, banks must sell regularly. Otherwise, they will break their balance sheets, and their incoming lending will be reduced because such ratios are also being looked at - based on the non-serviced receivables, it is decided how many new loans can be granted.

Let's say something about the financial culture of Bulgarians - is it improving?

No, I wouldn't say so. For me, the main thing that needs to be done is for the state to change the education system. This should happen in favor of subjects related to financial culture that children can learn in school. Maybe even starting as early as 1st grade. These days, kids are bombarded with information from all sides, so they begin to be aware early and are able to do more things than in the past. And from that perspective, I don't think we should wait until they're in the fourth, fifth, or eighth grade to explain to them the difference between a credit card and a debit card or other basic financial concepts. They need to know why they should save and how to manage their personal finances. Only in this way, in the future, we will be able to raise our financial culture as a nation. 

On the topic of financial culture, is the lack of it related to the growth of fast loans?

Quick loans have been heavily demonized in Bulgaria in recent years. They give money quickly and without cumbersome paperwork. If you are in need – say your car breaks down or your roof leaks - but your credit history is not in order, they give you the opportunity to not be completely excluded from the established financial and economic turnover. On the one hand, they should not be banished, but on the other hand, the fast credit companies should become more responsible lenders. Fast loans can be used as long as they are reasonable and borrowers know when they will repay the loan and where they will get the money for that so that they will not have to pay excessively high interest and penalties. In this regard, users' understanding of fast loans and their mechanisms should be increased, and that is related to improving the general financial culture of the people. 

Let’s talk about legislative changes. In recent months there has been talk of another project in your field to split the business sector into companies that buy receivables and companies that collect the purchased receivables.

Bulgaria should have adopted this draft law two years ago. The EU directive provides a framework, and each country chooses how to transpose it into its own legislation. What they have tried to do in Bulgaria is to translate the directive literally and borrow things from existing laws, such as the Commercial Banks Act. However, it is necessary to see the situation in the country in its absolute entirety before starting to write or transpose laws. Companies that buy loans at the moment are subject to licensing - we are financial institutions under a registration and licensing regime from the BNB for many years already. Now they are trying to put us in a situation where we have to relicense or have a dual licensing regime - something that is not clear at the moment or how it will work in practice.

One of the objectives of the directive is to liberalize the market. The company's capital requirement is proposed to be set at 25,000 euros. Currently, it is set at half a million euros, which gives greater reliability to this type of enterprise. Apart from opening up to more players, this could allow international deals as well. The second objective of the directive is to have fair and respectful treatment of customers.

For us, it is important that when a law is adopted, it is well thought-out, and that it is also linked to the rest of the legislative framework in the country, rather than being a "lonely island". If we adopt it in its current proposed format, we leave too much room for arbitrary interpretation.

And is any work being done towards developing the Personal Bankruptcy Act?

We want the Personal Bankruptcy Act to be adopted. There are three main concepts in this regard. One is personal bankruptcy in international law. Personal bankruptcy means, under certain circumstances, to exit the official economic turnover, but the issue is that when you exit this then you do not have the right to electricity, to a telephone, to a bank account - not only to a new loan. You leave the formal economic system and can only return under certain circumstances and after a certain period of time.

The second concept is related to the absolute statute of limitations, something that has been accepted in our country - a ten-year absolute statute of limitations.

The third concept is the non-sequestrability of property. It defines what cannot be foreclosed on you – your only home (unless it is mortgaged), minimum wage, social benefits and pension.

But there is no country in Europe where these three principles exist simultaneously. Here, we have non-sequestrability. We also have an absolute statute of limitations. The Bulgarian state, however, wants to have personal bankruptcy with very minimal bankruptcy criteria and absolutely no consequences. That is, with the adoption of that law, we risk potential abuses and thus increase the risk in the local financial industry.

What we want to avoid is that the people who stay in Bulgaria and pay their loans and taxes do not suffer a burden. That’s why there’s a need to adopt a thoughtful and reasonable law that will help both the consumers and the financial institutions.

Translated by Tzvetozar Vincent Iolov