The Memorandum on restructuring consumer loans in foreign currency (hereinafter "Memorandum") proposed by banks having the largest portfolio of mortgage loans to households provides for the restructuring of consumer mortgage loans in foreign currency with a principle due less than UAH 2.5 million at the official hryvnia exchange rate, set by the NBU as of January 1, 2015.

Banks’ obligations to comply with the provisions of the Memorandum arise only under certain conditions, most of which have already been met.

An important prerequisite for the entry into force of the Memorandum is the signing on May 5, 2015 of the Law of Ukraine On Amendments to the Tax Code of Ukraine (with regard to restructuring of loan obligations from foreign currency into hryvnias) by the President of Ukraine. 

Amendments to the Tax Code grant an exemption from individual income tax of individual borrowers’ proceeds arising from partial debt forgiveness. In particular, income derived from partial debt forgiveness through conversion of the outstanding debt under foreign exchange loans into hryvnias is exempt from individual income tax of 22%. This debt forgiveness shall apply to all loans in foreign exchange, except for loans to bank employees. 

Another prerequisite for the entry into force of the Memorandum has been met. In particular, certain NBU regulations have been amended to allow the National Bank of Ukraine to waive the application of sanctions against banks in breach of prudential ratios due to the restructuring of loans in foreign exchange and/or partial forgiveness (cancellation) of debt. In additions, the amendments to the NBU regulations provide guidelines on the subsequent classification and accounting treatment of these loans.

At the same time, Co-Chair of the Public Council Stanislav Arzhevitin regards as inexpedient the requirement to abolish the moratorium on foreclosure of property of individuals provided as collateral for foreign currency loans (imposed by the Law of Ukraine No 1304-VII, dated June 3, 2014 On Moratorium on Recovery of Property of Ukrainian Citizens Provided as Collateral for Foreign Currency Loans as today this move might stoke tensions in society.

“The Memorandum on restructuring consumer loans in foreign currency has offered a compromise solution to the problem of FX loans – without losses for depositors and the use of public funds –the result of a compromise reached between all stakeholders,” said Co-Chair of the Public Council Yaroslava Avramenko.

Accordng to her, it is the Memorandum that can offer a permanent solution to the problem of restructuring consumer loans in foreign currency. Under indent 19 (С) of the Memorandum on Economic and Financial Policies between Ukraine and the IMF the negotiation process between borrowers and banks over the restructuring of foreign currency denominated loans should be voluntary. “The state and the NBU should not interfere in bilateral negotiations between borrowers and banks while ensuring fair process. In this regard, should a law imposing mandatory conversion of foreign currency mortgages into hryvnia be passed, the president will veto its enactment,” reads the Memorandum.

The Memorandum has been signed by the following banks: UKRAINIAN PROFESSIONAL BANK PJSC, Alfa-Bank Ukraine PJSC, Nadra PJSCCB, BANK MIKHAYLIVSKIY PJSC, PRIVATBANK PJSCCB, BANK GRANT PJSC, REGION BANK PJSC, Delta Bank JSC, FIDOBANK PJSC, Platinum Bank PJSC, and CREDIT AGRICOLE BANK. Other banks having the largest portfolio of foreign currency denominated mortgage loans are considering the possibility of joining the Memorandum in the nearest future.

In order to launch the debt restructuring process, a borrower is required to file with the bank a written request for converting the outstanding debt under foreign exchange loans into hryvnias in accordance with the Memorandum. Then a borrower will be given a written reply from the bank. If a borrower's request is rejected by the bank or if a borrower is offered less favorable terms and conditions than those set forth in the Memorandum, a borrower has to submit a written application with the accompanying documents to the Commission to be established at the Public Council in the nearest future.

Therefore, the entry into force of the Memorandum opens the way for settlement of the issue of restructuring consumer loans in foreign currency, thus reducing financial burden that borrowers experience due to the political and financial crisis of 2014 that caused the domestic currency currency.

For reference

As a side note, the Memorandum is the result of a long process of discussion between public and banks of all possible solutions to this painful issue. The National Bank of Ukraine has acted as a coordinator and mediator of the overall negotiation process, provided a platform for finding an effective solution to the problems encountered by FX borrowers, and supported a common compromise solution. 

Previously, when the Memorandum was being negotiated and drafted, there were several versions of this document. As Governor of the National Bank of Ukraine said, the version of the Memorandum proposed by the banking community was more acceptable than that proposed by the Public Council as it was not linked to the exchange rate and provided for a partial write-off of debt.

The fundamental difference between the two proposed versions of the Memorandum was the principle underlying conversion of foreign currency loans into hryvnias. The Public Council suggested that consumer loans in foreign currency be converted to hryvnias  at the exchange rate set by the NBU as of January 1, 2014 (UAH 8 per USD 1), but this shall apply to loans not exceeding UAH 2.5 million at the exchange rate set by the NBU as of January 1, 2014 (approximately USD 312 thousand). The version of the Memorandum proposed by the banking community has introduced the term "public housing" (an apartment of up to 60 sq m or a house of up to 120 sq m). With regard to such mortgage loans, banks are obliged to write off 50% of the outstanding debt following conversion of foreign currency mortgages into hryvnias. As for mortgage loans secured by larger dwellings (apartments, houses), banks are prepared to write off not less than 25% of the outstanding debt. However, with regard to public housing and larger dwellings, the amount of foreign exchange loans that can be converted to hryvnias is limited to UAH 2.5 million at the exchange rate set as of January 1, 2015 (approximately USD 158 thousand).