PwC Podcast: Ukraine’s news ad hoc #6. What should I do with loans and mortgages today & Currency regulation news

Artem: Vadym, hi! It's been a month since our first episode aired, and there were significant developments in almost every industry during the time, with probably the biggest changes in banking and finance. Could you summarise 3 to 5 key developments during this time? 

Vadym: Artem, hi! I’m glad to be talking to our audience again today. Indeed, things have changes a lot. So I will provide a brief overview of the current regulation focusing on the changes made since our first podcast was recorded in early April:

First of all, the official USD exchange rate is still fixed as of 24 February. 

However, there are some nuances with commercial exchange rates used by banks. While the permitted difference between the commercial bank exchange rate and the official rate was previously capped at 1 percent (no exceptions), now such difference for payment cards used abroad is permitted for up to 10%. Of course, banks immediately took advantage of this by raising their exchange rates. Previously, when you used your UAH card abroad or paid online on foreign websites, the bank exchanged at approximately UAH 29.5 per 1 USD. Now, however, the bank may set its exchange rate as high as UAH 32.18 per 1 USD, and nearly every bank has been doing exactly that.

In fact, the NBU has been talking about going back to the flexible exchange rate. So it is completely possible that the NBU will cancel the fixed rate even before martial law is lifted.

Second of all, same as before, it is permitted to receive payments from abroad and make settlements in Ukraine without any issues whatsoever.

Third of all, the general ban on making payments abroad is still in place. Some payments were permitted, others added to the ban, but the overall vector has remained the same.

So what has changed for businesses? The key changes are as follows: 

• The list of critical imported goods with permitted payments abroad is still in place but constantly extended. I still believe that this list should be cancelled since it is discriminatory in nature and regulated completely manually. Yet, it's still there.

• In the previous podcast I mentioned it was likely that the period allowed for settlements under export and import transactions could be reduced. This has in fact happened and the period has been reduced from 365 to 90 days.

There were certain changes for individuals, too.

• First of all, in mid-April, the NBU permitted selling physical foreign currency cash. The selling exchange rate may not exceed the official rate by more than 10% (so about UAH 32.18). Yet, there is still a shortage of physical cash as the NBU permitted selling it only in the amount that someone else has previously sold through the respective cash desk of a bank or a currency exchange desk.

• The UAH 100 thousand limits are still in place but there are new restrictions  in place to prevent unnecessary outflow of foreign currency abroad for purposes unrelated to meeting essential needs. In particular, quasi cash transactions are only permitted from a foreign currency denominated account. I have already spoken about it; previously, you could use the balance in your UAH account to buy cryptocurrency from a currency exchange or top up e-wallets such as Wise, Revolut, Paypal. Now this is only permitted from foreign currency accounts.

And, of course, there was a lot of less significant changes, e.g. some exceptions from restrictions were added, the scope of application clarified, etc. These are the main developments since our last podcast. 

Artem: Thank you, Vadym, this is clear.  Now let's talk about loans payable during martial law. What is the latest in this area? As far as I know, a repayment holiday rule is in place during martial law. What does it mean for individuals? 

Vadym:  Many Ukrainians have entered the wartime as borrowers under loan agreements. Once the top priority wartime need, being the personal safety, has been met, such Ukrainians should understand how to handle their loan obligations. 

The first thing to remember is that there is no automatic forgiveness of debt for any loans. The war does not fully absolve borrowers from their loans.

At the moment, the legislator enacted the so called ‘repayment holidays’ in order to make things easier for Ukrainian borrowers during the war and for the initial stage of the post-war economic recovery, in particular:

• During martial law and for 30 days after it has been lifted, borrowers will not be liable for late payment of their loans. Financial institutions are prohibited from charging penalties (fines, late payment interest) or other charges that in nature represent late payment charges and any such payments charged since 24 February 2022 must be written off. This rule applies to all loans, consumer and entrepreneurial alike.

• Interest is still charged, however banks are prohibited from increasing interest rates under consumer loans to individuals in case of default of scheduled contractual repayments. The interest rate can only be increased if the agreement provides for a variable interest rate (typically linked to UIRD index [Ukrainian Index of Retail Deposit Rates]);

• This has no negative effect on the borrower’s credit history. This means that a default on the loan during the war would not prevent the borrower from obtaining future loans.

In simple terms, a repayment holiday provides an exemption from liability for defaulting on a loan during the war. The repayment holiday helps overcome hardships by temporarily relieving the financial burden without breaching the obligation to the creditors.

However, the NBU and commercial banks rightfully recommend not to abuse this right and make regular loan repayments as usual if you are in a position to do so. This is your contribution to normal operation of the economy, which is critically needed under the current conditions. 

Artem:  This sounds like something very timely and useful, perhaps for each of us. I have a question, though. How do financial institutions comply with these requirements? Something tells me they are not too happy about such holidays, particularly now.

Although the above rules are not just recommendations but rather legal requirements, in practice, many consumers have complained that financial institutions require them to make all payments as scheduled. Even more, some of them still require all penalties and send threats if not paid.

Cases when financial institutions and collectors have stepped out of line in collecting consumer loans have long become infamous. All the stories about photo collages and late-night phone calls would hardly surprise anyone these days. In order to put a stop to these unethical practices, a new ‘collector’ law has been in force in Ukraine since summer last year, setting ethical behaviour rules for financial institutions engaging in collector activities. This law also grants additional regulatory powers in this market to the National Bank of Ukraine, such as the registration of collectors, imposing fines for ethical violations, etc. 

Pre-war, the NBU has been gaining momentum in addressing this issue. In January-February, the regulator would slap unethical collectors with fines nearly weekly. 14, 28 January, 4, 11, 18 February: these are the days when the regulator imposed penalties on at least one financial institution. However, since the war started, the NBU website has yet to post a single news item about regulatory measures imposed on collectors. 

It is clear that in war times the regulator had to re-prioritise its efforts. Unethical players have taken advantage of this by not wasting their chance to benefit even during the war. 

Yet, the NBU still monitors this problem. On 14 April, the NBU sent an open letter to non-banking financial institutions and collector companies with a ‘gentle reminder’ about the non-optional repayment holiday and ethical requirements. It is completely possible that fines and other regulatory measures for bad faith players will be resumed in time.

In the meantime, the borrowers suffering from the lender’s demands to repay right now can go ahead and file a complaint with the NBU. Or even report the case to law enforcement authorities if explicit threats took place.

Artem: It is good news, in my opinion; receiving threats by phone and notifications from the bank demanding scheduled repayments even if you are unable to do so and threatening late payment interest, especially in such times, is completely unacceptable.  Not everyone is aware of the ‘repayment holiday’ and ways to assert your rights in the matter.  Vadym, thank you, I think you gave an answer to many people’s concerns.

Still, I have a question that has been a concern from the initial days of the war. What should mortgage borrowers do? I am particularly interested to find out what one should do when their property has been demolished but is still under mortgage. 

Vadym: Of all the borrowers, those taking out a mortgage on real estate property have traditionally faced the biggest issues. The legislator has provided additional protective measures for them.

The ‘repayment holiday’ for mortgage loans additionally includes a rule whereby lenders are prohibited from repossessing the mortgaged asset and/or evict residents from mortgaged premises. So, similar to other loans, it is possible to stop making payments against mortgage loans for the period of the war. Yet, you should still remember that this is just a deferral on your obligations and the debt will still need to be repaid after the war, otherwise you would risk losing your flat. 

Those people whose house or flat has been demolished are in the worst position, since even extreme circumstances such as these do not cancel their obligation to repay. Insurance coverage does not save the situation, either, as hardly any insurance contract would cover military risks. 

Under these circumstances, after the war, the individual would still be liable to repay the loan, whilst hoping for other ways to recover the damages inflicted on them. 

As an option, a damage recovery mechanism via a Damaged Property app in Diia is currently under active consideration for demolished properties. Yet, Artem, I believe you are in a position to tell us more about it as this is your area of expertise. 

The situation is extremely complicated and it is highly likely that Ukraine may be facing another moratorium on its obligations for many years to come. Potentially, it will be a moratorium on repayment of mortgage loans until damages are recovered via the above mentioned Damaged Property app in Diia, if this mechanism is seen as the most effective. 

Artem: Vadym, thank you very much. So, to summarise, what are your top 3 tips based on the martial law regulations? 

Vadym: Artem, thank you for your question. Indeed, we have discussed a lot today so let’s summarise. I would advise paying attention to the following: 

1. Currency restrictions continue to evolve and it makes sense to keep an eye on them. No radical restrictions are unfortunately in sight yet as the situation remains highly strained;

2. Interest continues to be charged on loans during martial law but one can effectively stop repaying as there is no liability in the event of default. However, debt is not written off and so I recommend repaying your loans if you are in a position to do so.

3. Those whose properties under mortgage have been demolished also need to stay on top of regulatory developments. It is a pressing issue well understood by everyone, so a balanced solution will hopefully be available soon. 

And, of course, keep calm, take time to consider your decisions and stay on top of legislative developments. 

Artem: Vadym, thank you for your tips. I would not be surprised if this episode collects the biggest number of plays as the volume of useful and practical information is unprecedented. 

I also recommend that our audience follow legislative developments and subscribe to our Telegram channel  PwC Tax&Legal Insights, where my colleagues from Tax and Legal and myself post about all important developments and our expert views.

In the next episode, we will talk about changes in IT law and next steps.

So please like our posts on Soundcloud, subscribe to our channels on your preferred social media and keep up with the latest news. See you online! Everything will be Ukraine!