The Italian government is planning to implement a borrower-friendly measure concerning bad loans by the end of the year. This is part of Prime Minister Giorgia Meloni's efforts to assist distressed individuals and businesses amidst rising interest rates. The proposed new framework aims to allow individuals and small corporate borrowers to settle their delinquent debts from previous years for a fraction of their nominal value.
However, this new law may potentially create further dissatisfaction among lenders and international investors, as Italy is still recovering from a surprise windfall tax on banks. Concerns from investors mainly revolve around the possibility that these measures could completely eradicate their returns and put Italy's market for non-performing loans at risk.
The primary objective behind this measure is to help lift as many people and companies as possible out of their bad loan situations, enabling them to resolve their old debts and get back to work, according to Industry Minister Adolfo Urso.
The proposal was originally introduced by lawmakers close to Prime Minister Meloni late last year and has gained support from Urso. Opposition lawmakers have also presented a separate bill on the matter. While the parliament is scheduled to start discussing the measures next month, the government may choose to expedite the approval process by including the bill in one of its upcoming decrees, as per sources familiar with the matter.
Similar to the recently approved bank windfall tax, lawmakers under Meloni's administration are aiming to control excessive profits made by financial players, as mentioned in the draft law. The draft states that investors in non-performing loans, often of international origin, purchase these debts under dramatic circumstances and profit from the weaknesses of both banks and borrowers, generating "loan-shark-like margins" that are deemed "frankly unacceptable."
Typically, investors acquire these loans in portfolios or package them into securitizations, often with a state guarantee, for a fraction of their face value. Unsecured loans, such as credit card loans, are usually sold for less than 10% of their original value, while debts backed by real estate or other assets can fetch higher prices.
If approved, the new law would allow Italian borrowers with debts of less than €25 million ($27 million), which became non-performing between 2015 and 2021, to repurchase them from funds that bought them from domestic lenders before the end of last year. Debtors would need to pay a 20% premium on the transaction price, according to the proposal presented by Meloni's party.
Gregorio Consoli, a managing partner for finance at law firm Chiomenti, noted that the proposed bill limits recovery on the best credits, potentially impacting the rationale behind these investments. Furthermore, the uncertainty surrounding the rules may lead to funds becoming reluctant to invest, making it more challenging for banks to sell their bad loans, which could affect their ability to grant new loans.
This potential law would further impact the Italian non-performing loan market, which has attracted numerous international buyers since 2015. International funds have invested billions of euros in purchasing bad loans held by Italian banks over the past eight years, enabling the banks to exit difficult-to-recover positions and stimulating new lending activities.
Moreover, the law may also have consequences for state guarantees provided to help banks offload approximately €110 billion of bad loans. Through the GACS program, banks bundle their bad loans into securities for sale, while acquiring a state guarantee for the least-risky portions to make them more appealing to investors.
While the precise impact of the law on the GACS program remains uncertain, it is inevitable that the current form of the law would have some ramifications, according to Consoli.