Response to consultation paper amending Guidelines on definition of default
7. Question 7. Do you agree with the revised treatment of technical past due situations in rela-tion to non-recourse factoring arrangements? And if you do not agree, what are the rea-sons? Do you have any comments on the clarifications of paragraphs 31 and 32 in the current GL DoD?
Leasing activity is impacted by the definition of default because of its specific characteristics that differentiate them from traditional bank lending. This significant impact leads to artificial Non-Performing Exposures (NPE) rates that are not triggered by financial problems but due to the way the counting of the days are defined in the final guidelines as well as the way the obligors make their monthly payments.
Payments in the leasing industry
All lease obligations have to be invoiced and only become due when invoiced. Subsequently, the invoices are processed by the debtor’s finance department.
Leasing is a tri-partite contractual agreement involving a debtor, a creditor and a supplier. The lessee selects an asset from a supplier and this asset is then purchased by the lessor and made available to the lessee to be used in its day-to-day operations in return for rentals.
As a result, financial lease transaction obligations are often treated by the obligor as supplier obligations rather than financial obligations.
Vendor leasing
The vendor lease channel is of specific importance for European SMEs to obtain access to financing of their production assets. Vendors use leasing to facilitate access to assets needed by their customers in their day-to-day operations and to establish a long-term customer relationship that goes beyond the maintenance and servicing of the assets. Financial leasing companies fund these structures by purchasing “leases chains” written by vendors or by accepting direct referrals from vendors. It is quite common that the vendor writes the lease, sells the lease contract to the financial leasing company, whilst the lessee (customer of the vendor) remains unaware of such sale. The customer’s relationship with the vendor (asset supplier) is a commercial one and not primarily of a financial nature.
Proposal for leasing
Delayed payments within financial leasing are not uncommon and have a technical and an operational background. Based on our experience, we estimate that 90 days should be sufficient to absorb the administrative delays in payment of financial lease obligations.
Therefore, we request the EBA to treat leasing in the same manner as factoring for the days past due.
The Original EBA Guidelines 2017 is to be amended:
23 (d) in the specific case of leasing or factoring arrangements where the purchased receivables are recorded on the balance sheet of the institution and the materiality threshold set by the competent authority in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013 is breached but none of the receivables to the obligor is past due more than 90 days.