KBC warns that across-the-board debt forgiveness is not on the cards

KBC Bank will not be writing off debt when it is working its way through its mortgage arrears over the next few years, according to its chief executive John Reynolds.

According to its last set of accounts, 29% of its €3.2bn buy-to-let mortgage book is in arrears and 17.5% of its €9.3bn residential mortgage book is in arrears.

Debt forgiveness has become a hugely political issue in tackling the mortgage arrears crisis. The opposition parties in particular are clamouring for debt write-offs as part of an array of solutions aimed at keeping people in their homes and put on a sustainable repayment position.

Mr Reynolds argues that it would be counter productive to commit to any “pre-ordained regime of debt forgiveness before entering negotiations”.

“If there is an expectation that some people will have x% written off and other people will have to pay the full amount, I don’t see how that can work.

“What we will do as a bank is to work through painstakingly with each customer the possibility of putting in place a sustainable solution.”

If at the end of a three-year work-out period, that particularly customer is still not in a sustainable position, then KBC will renegotiate the terms of the resolution agreement.

“We will sit down again and work through another phase. If you think about the proposition that we enter this process with the intent that there will be some sort of debt forgiveness, if it doesn’t work, then what would be the incentive for the borrower to make it work?”

There are currently two roadmaps to dealing with distressed customers. There is the new personal insolvency arrangement and an agreement hammered out by the Central Bank between secured and unsecured lenders. Mr Reynolds believes that both of these will “cater for the vast universe of cases, although there will be the small minority who just won’t engage with their lenders.”

Roughly 20% of all Irish mortgages are in some sort of difficulty. Mr Reynolds expects that the vast majority will be dealt without resorting to the personal insolvency process. However, before borrower and lender enter into an agreement over a repayment schedule that will put the borrower on a sustainable position over the medium term, “there has to be a reasonable prospect of success, or else it is a waste of everybody’s time”.

A functioning banking system has to work on the premise that all debts will be repaid, he argues.

Speaking at a recent conference, the Central Bank governor, Patrick Honohan, said that split mortgages were the most effective way of dealing with distressed borrowers.

The borrower will service the payments on one portion, while the other portion will be parked for an agreed period. Mr Honohan argued that the parked portion of the debt should not accrue interest on the basis that it would make it unattractive for the borrower to work their way through the serviceable portion of the debt and then face another huge burden of debt.

Mr Reynolds says that KBC will be applying interest to the parked portion of the split mortgage, but the rate of interest will be determined on a case-by-case basis and on sustainable terms.

Despite a troubled few years in this country, the bank remains fully committed to Ireland, he says. KBC Ireland made an after-tax loss last year of €269m following an impairment charge of €510m

The bank’s current lending is not at the level he would like: “Maybe we have not done a good enough marketing job in that respect, but we will.”KBC recently opened a new office in Cork, which is a statement of its intent to capture more of a market share in this country, he says.

A stabilisation of the unemployment rate and housing prices; continued robust flows of foreign direct investment and a resolution to the eurozone crisis are all needed to restore confidence and get the domestic economy moving again, he adds.