Banks are filling up with foreclosed properties as collateral for bad debts
QCOSTARICA – Ahead of Semana Santa (Easter) 2020, the pandemic forced Diego’s family to abruptly close two restaurants, a parking lot and a sports academy due to the health order for the whole country. The economic crisis began and as the weeks passed it became clear that reopening was a distant option.
Borrowers, who used to benefit from deferred payments, are now facing foreclosures and bankruptcies for their inability to repay their loans.
The situation is observed both in private and public banks. And should get worse. For next year, it is estimated that they will start to increase according to the Consejo Nacional de Supervisión del Sistema Financiero (Conassif) – National Council for the Supervision of the Financial System and the Superintendencia General de Entidades Financieras (Sugef) – General Superintendence of Entities Financières (Sugef), as part of the phasing out of loan easing measures.
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Banks, in their effort to recover assets, have executed collateral primarily on property, but also on vehicles. Until September, the recovery of assets acquired for bad debts amounted to ¢387,734,000,000 colones, an increase of 51% over the last five years.
The execution of a guarantee is carried out when it is not possible to reach an agreement of payment with the debtor and after obtaining a final judgment for judicial recovery.
“It is expected that during the year 2022, as the return to normality continues, there will be increases in accounts such as assets acquired in loan recovery, the amount of which will depend on the recovery rate of the economy and the level of employment”, underlined Rocío Aguilar, head of Sugef.
The official emphasized that collateral assets are not the goal of a financial institution, but the last resort to recover a loan.
Seizure of properties that secure a loan means financial and financial deterioration for a bank.
The regulations require entities to make an estimate to cover the value of said asset. Then, the more the goods and vehicles acquired in credit recovery grow, the more the institution must allocate resources to its recovery and its maintenance, draining.
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To prevent this situation from becoming a problem, Conasiff has agreed to allow financial institutions to reserve acquired assets for a longer period of 48 months, instead of the initial 24 months, according to Conasiff President Alberto Dent. .
Conassif’s board of directors agreed in March last year to temporarily establish this measure. “The possibility of amortizing the value of the asset over a period of 48 months remains as it is. We are not going to change it at the moment, at least we will leave it for the whole of 2022. We see no justification for changing it, especially since, with the removal of regulatory flexibility, we believe that the banks will have to make decisions about non-viable customers,” Dent explained.
The president of Conassif explained that the regulatory exceptions have been applied cautiously, it will continue to be done in the same way.
Evolution by sector
Information from Sugef shows that in all segments of the financial system, there has been an increase in the balance of seized assets due to non-payment of loans over the past five years.
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State-owned banks, Banco Nacional (BN), Banco Popular and Banco de Costa Rica (BCR), reported a balance of properties acquired for 256.8 billion colones, a growth of 32% in five years . Meanwhile, in the eleven private banks, the amount stood at ¢87 billion, up 116 percent from ¢40.3 billion in 2017, data recorded on the Sugef website shows.
Allan Calderón, Banco Nacional’s deputy general manager for risk and credit, stressed that the extraordinary measures approved were correct. But when completed, the effect will depend on the actions taken by each entity.
“(…) Depending on the particular situation of the sector and of each client, this will be the effect on delinquency that can be expected. Now it can be expected that there will still be customers who will not leave before these arrangements and therefore a slight increase in arrears is to be expected,” Calderón acknowledged.
Laura Moreno, vice president of corporate relations at private bank BAC Credomatic, explained that regulatory easing measures and programs created by each bank prevented many transactions from accessing a judicial collection process.
“We don’t expect a significant increase in this area (foreclosed assets) because a large portion of clients who received financial assistance are meeting their obligations based on their current income,” Moreno said.
Maurilio Aguilar, director of Corporate Risk at Banco Popular, recalled that before the pandemic there was an inventory of operations in judicial recovery and these are, in the case of the entity, those that are being executed.
“Not all economic sectors have managed to reach the levels of activity they had in the pre-pandemic era, which means that the flows of their operations have failed to balance each other. If these sectors do not benefit from new payment modalities, they will not be able to fulfill their commitments with banks,” said Aguilar.
He added that if the Council and Sugef eliminate regulatory flexibility, court processes and adjudicated assets will increase.
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