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Economic Impact of the Registered Pledge System in Bulgaria

Center for Economic Development. Economic Impact of the Registered Pledge System in Bulgaria. Georgi Mihaylov Researcher , CED. The Economic Impact of Registered Pledge Systems June 4, 2002. Bank System 1996 – 1997. New procedures for bank insolvency

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Economic Impact of the Registered Pledge System in Bulgaria

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  1. Center for Economic Development Economic Impact of the Registered Pledge System in Bulgaria Georgi Mihaylov Researcher, CED The Economic Impact of Registered Pledge Systems June 4, 2002

  2. Bank System 1996 – 1997 • New procedures for bank insolvency • 14 banks (24% of the bank system) were set under supervision (soon the number grew to 18) • A veto was imposed on • dividends payment (without permission from the BNB) • new credit granting • Limiting the interest rates and serious cut in the operating expenditures • Measures for collection of credit claims

  3. Crisis in the Banking Sector 1996 – 1997 • As a result: • Paralyzed Bank System • Mistrust in the institutions in the sector • A great depreciation of the local currency (BG Lev) • A few months of hyperinflation (Dec’96 – Feb’97)

  4. The Solution – Currency Board • Serious restrictions for last instance credit • Firm regulations for managing and supervision over trade banks • High requirements for bank solvency • Elimination of high-risk and unsecured credits

  5. Current State of the Banking Sector • 35 banks operating on the market, divided in five groups • I group – balance number (BN) above 800 mln BGN (~410 mln EUR), providing 34% of the credit resource • II group – BN from 300 to 800 mln BGN (~153 to 410 mln EUR), 28% of the credit resource • III group – BN from 100 to 300 mln BGN (~51 to 153 mln EUR), 13.5% of the credit resource • IV group – BN up to 100 mln BGN (~51 mln EUR), 10% of the credit resource • V group – branches of foreign banks, 14.5% of the credit resource

  6. Credit Market in Bulgaria • Average share of credits as a percentage of all bank assets for the last three years – 30% • I group – 25.35% II group – 39.20% III group –36.25% IV group –39.20% V group – 61.22% Total amount of credits as of 31.03.2002 4 354 165 BGN

  7. Pledge System in Bulgaria • Law on registered pledges • enacted on November 22, 1996 • became effective on April 4, 1997 • amended 1999 • Main characteristics of specific pledges: pledges established without the delivery of the pledged property • Central Pledge Registry

  8. Pledge System in Bulgaria (continued) • Property that may be pledged: • Accounts receivable and groups of accounts receivable • Uncertified securities and groups of uncertified securities • Chattel exclusive of ships and aircraft • Groups of machines and equipment, of goods and materials • Entity shares in general and limited partnerships, limited partnerships with shares or limited liability companies • Commercial enterprise

  9. Central Pledge Registry • The Central pledge registry keeps track when the pledged property is as follows: • Accounts receivable and groups of accounts receivable • Chattel exclusive of ships and aircraft • Groups of machines and equipment, of goods and materials • Commercial enterprise- after the entry in the Commercial Registry

  10. Bank’s Preferences for Collateral • Mortgage • Pledges on movables • Pledges on accounts receivable • Pledges on stocks and shares • Third party guarantee

  11. Credit System Trends

  12. Credit Portfolio of Commercial Banks

  13. Impact of the Registered Pledge System • Improved access to credits for the business • Real growth in the size of the credits granted by the banking sector • Serious improvement in the structure of the credit portfolio of the banks • Broadening the scope of the businesses that are eligible to receive credit

  14. Business Attitude towards Credits • Unable to provide required collateral and credit history • Difficulties to prove legal documents for high profits and positive cash flow • Lack of information and generally negative attitude • And though: 48.48% of all sources and types of financing are bank credits* *survey among over 1500 enterprises

  15. Major Problems Hindering the Credit Process • Obsolete equipment that does not satisfy the requirements of the banks • !!! The excessive stress that banks put on collateral, rather than on: • business plan • future financial flows • management quality, etc. • Restrictive policy of the BNB

  16. Major Problems Hindering the Credit Process (continued) • Frequent changes in the tax and duty regimes • Difficulties in collecting claims • Advantagesof the State compared to other creditors • Problems for most banks to provide resources for long-term crediting

  17. Tendencies for Improvement of the Legislation • Revision of the legislation with regards to the Registered Pledges System • Law on Registered Pledges • Civil Procedure Code • Penalty Code • Commercial Law • BNB regulations

  18. Tendencies for Improvement of the Legislation (continued) • Revision of the Law on Registered Pledges • Creation of a unified registry, providing immediate and easy access to the information • Revision of articles regarding the dispute between the creditor and debtor • Provision of penalty for the debtor, when disposing of the pledge without consulting the creditor • Improvement of the technical equipment of the Registry and the qualification of the human resource

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