The Covid-19 crisis is having a significant impact on the economy, including the payment options of debtors and bill-paying customers as well. In connection with this, at the end of March the Hungarian Government published two decrees restricting certain enforcement measures and (coercive) acts used in enforcement proceedings, and the auctioning of real estate by natural persons, furthermore also prescribes a ban on the eviction from these properties for the duration of the emergency. Economic and regulatory changes may affect several sectors.
Impact on the debt collection services
New legal and economic changes are also important for the operation and process of the sector, but their impact is different in the short and medium term. Changes in enforcement procedures and order for payment procedures (for the duration of the emergency), as well as significant negative economic effects (especially rising unemployment), may make it difficult or in some cases restrict the ability to enforce claims. On the other hand, unfortunately the Covid-19 crisis will increase the volume of overdue loans and utility bills in the medium term, creating new business opportunities for debt managers, especially after the payment moratorium.
Based on the above, in our opinion, it is worthwhile to separate the short-term and medium-term goals of the institutions involved and the tasks and tools required for this:
Bank impairment models typically consist of several components driven by different risks. One of these is the loss given default (LGD), which is based on the difference between the exposure at default and the returns from customers. Returns may include, for example, proceeds from enforcement proceedings or the sale of collateral. In many cases, banks choose to sell the receivable rather than take certain collection steps, and the purchase price of the receivable is a return to the bank. A debt collection company then carries out the collection and, in many cases, initiates enforcement proceedings.
The new government decrees affect banks' return opportunities in different ways:
Given that historical data relevant to the situation related to the emergency is not available, the LGD estimate cannot be changed on a purely statistical basis, expert forecasts and corrections may be required in the short term.
Similar to bank’s impairment, the decline of the debt’s purchase prices may also be reflected in the impairment models of the telecommunications and other service sectors, due to the fact that they can only sell their non-performing exposures at a significant discount.
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