The practice has proven controversial in recent times but a new study from the Banking & Payments Federation Ireland (BPFI) claims it has its benefits.
Ever since the property crash just over a decade ago, banks in Ireland have been left with a large number of loans on their books which have gone sour. Often called non-performing loans or NPLs, these are personal loans, business loans and mortgages which people are either struggling to repay or have stopped paying altogether.
At the height of the financial crisis, NPLs made up over a quarter of some Irish banks’ total loans, which was way above the Eurozone average at the time.
Having so many NPLs on a bank's books can cause all sorts of problems. It can severely impact on a bank's profitability, its ability to lend to new customers and its ability to function properly.
Because of this, the European Central Bank (ECB) has been putting pressure on all banks, but particularly Irish banks, to reduce their level of NPLs to below 5%. So in order to meet this objective, Irish banks, among other things, have been selling off their NPLs over the past few years to investment funds, or so-called vulture funds, to help meet the target.
Vulture funds are companies which seek to buy distressed assets and badly performing loans at a reduced price, with the aim of selling them on a later date for a profit.
However the process has proven controversial with many arguing that’s it’s putting already vulnerable people in an even more vulnerable situation and leading to large scale home repossessions and homelessness.
However in a paper released today the BPFI has defended the sale of NPLs to vulture funds saying it has helped banks to reduce the ratio of bad loans on their books, improve the strength of banks, while still giving protections to borrowers.
But the BFI states that further important progress on this front is not helped by misleading claims. As a result the BPFI is trying to dispel some of the so-called myths and misleading claims around the sale of non-performing loans to vulture funds.
What are the misleading claims?
According to the BPFI a number of misleading claims are being thrown about, such as.
- Claim: borrowers do not have the same protection when their loans are sold on by banks
Fact according to BPFI: Borrowers do have the same protection
- Claim: Investment funds do not offer to borrowers forbearance measures similar to those from banks
Fact according to BPFI: Investment funds do provide a wide range of forbearance measures to borrowers
- Claim: Ireland is facing a ‘tsunami of repossessions’
Fact according to BPFI: Repossession here are low by international standards
- Claim: Investment funds do not facilitate arrangements for borrowers
Fact according to BPFI: Investment funds do put arrangements in place for borrowers
Commenting on the release of the paper, Brian Hayes, BPFI Chief Executive, said:
“The sale of non-performing loans (NPLs) to third-party investment funds provides benefits for banks and protection for borrowers”,
“Our banks have made significant progress in reducing their NPL ratios in recent years. The extent to which this is contributing to healthier bank balance sheets is good not just for banks but for the wider economy which depends on banks for personal and business lending. At the same time, the Central Bank of Ireland, with the support of the Oireachtas, has ensured that the protections afforded to borrowers by the relevant Codes, including the Code of Conduct on Mortgage Arrears, travel with the loans.”
BPFI’s Chief Economist, Dr Ali Ugur, added:
“Unfortunately, a number of false claims made about the NPL sales process have created unhelpful myths. We believe it’s important to dispel those myths by illustrating the way in which the process provides one of a number of very important solutions to the management and resolution of mortgage arrears."
What do you think?
Have you had your loan sold to a so-called vulture fund? Either way, how do you feel about the practice? Do you think it has its benefits? Get in touch and let us know.