Retroactive laws pose biggest threats to creditor rights in CEE economies

Creditor rights in the Central and Eastern European (CEE) countries remains a weakling, with retroactive laws and sluggish courts defining the biggest threats to such rights in the region. No major changes in creditor rights have taken place recently in the Czech Republic, at least regarding existing loans.

While investor protection remains a hot topic in Croatia, the last couple of years have witnessed a relatively blurry picture overall. On one hand, introduction of pre-bankruptcy (out-of-court) settlements in 2013 and changes to a bankruptcy law implemented in 2015 brought some improvements, as are being reflected in the 'Doing Business' data, the forced conversion of CHF loans significantly shook investors’ confidence, ERSTE Group reported.

Though the Czech Republic has not witnessed any major changes in creditor rights, there are some changes in terms of new credits, namely, the Mortgage Credit Directive has been transposed into Czech law this year, which will put a greater administrative burden on creditors and bring new rights for debtors, e.g. early repayment of loans.

In contrast to the above, Romania has witnessed a string of legal initiatives aimed at strengthening debtors’ rights ahead of December parliamentary elections. A law that enables retail customers to return real estate collateral to banks in exchange for writing off their loans entered into force in May and more than 4,000 people have taken advantage of it so far. The payment discipline of retail banking clients has been significantly better than that of corporate customers, with the non-performing loan ratio at 9.1 percent in December 2015 for private individuals and 26.2 percent for non-financial companies.

"Although the overall business environment in Serbia has improved in recent years, we still see a lack of progress in the legislation related to investors' rights and protection," the group research commented in its latest report.

In addition, the financial sector of Hungary has been struggling hard with increasing NPL stock and the hindering measures taken by the government, since the financial crisis hit the country. Even though there has been some consolidation in the relationship between the government and financial sector recently, as the tax levy was cut in 2016 and the moratorium on evictions was lifted this March, banks might remain reluctant to increase their lending activity, especially in mortgages, not just because the demand of households may be lackluster, but due to the uncertain business environment and unpredictable legislative processes.

Looking forward, it is expected that the government will keep this track record and we will probably see additional gradual improvement in this institutional quality sphere.