SME risk through credit insurance and trade credit insurance via banks

– How passing on risk without client permission increases insolvency risk -.


Alternative to expensive supplier credit

The retail trade often makes use of so-called supplier credit, i.e. agrees a payment term, and has then sometimes long since sold on the goods purchased by the time the actual payment is made. The supplier can also insure himself against bad debts – for insurance premiums usually around 1-3 per mille. With a discount of 3 %.for payment within 10 instead of 30 days, the effective interest rate of a supplier credit is over 50 %. %. Larger retailers in particular therefore use interim financing via private banks or savings banks as an alternative to supplier credit. In many cases, banks then also try to pass on the bad debt risk to insurance companies in exchange for part of their interest margin.


Insurance cover instead of equity

This is a good deal for the bank, because by passing on the risk, the bank no longer needs to hold equity capital for this commitment as its own collateral, and can thus expand its own lending business even further. From the insurer’s point of view, its commitment is linked to the real world or to real existing values.


Visit of rating agencies and credit insurance to SMEs

Armin Schlau (*name changed) ran his retail chain with credit financing unmolested until his principal bank resold “their risk” to an insurer by insuring the credit default risk only. The unsuspecting medium-sized company then received a friendly invitation from its bank to disclose its books and to submit various reports on a regular basis without being asked to do so. There was no legal basis for this – only the de facto unspoken threat of a loan termination by the house bank, which was in any case permissible at any time without any justification. He was blatantly told that a wrong move on his part would lead to the termination of the loans, because since the “sale of the default risk to the insurer” the house bank no longer had the say in questions of creditworthiness assessment.

A poorer credit rating – even if it is due to the failure to submit documents proving the opposite – leads to the rejection of the insurance risk or to higher insurance premiums for the loan and thus ultimately to the bank’s profit margin being used up – right up to a loss-making business for the bank or a risk of loan default that is no longer calculably high and which the bank itself has to bear. Unfortunately, the willingness to pay higher interest rates then leads to an even greater decline in creditworthiness and an even greater increase in insurance premiums, so that the bank realises an even greater loss. This is because the borrower is indicating that he can no longer get a cheaper loan anywhere else and that he is up to his neck in debt.

The entrepreneur had no choice but to give in to the wishes of his bank, which signalled that it was in the insurer’s hands to cancel the loan if the creditworthiness became insufficient, and that the insurer would therefore no longer bear the risk, or only at much higher premiums.

He himself had no contractual business relationship with the insurer until the bitter end of the relationship due to his own insolvency. The credit insurer appeared out of nowhere, and disappeared again – then came the real credit termination of the house bank – for the expert an economically completely comprehensible process. The expertise of a credit insurer will enable the bank to better assess its risk, reduce it overall and ultimately lend out loans at more favourable interest rates depending on creditworthiness, rather than on equally favourable terms for both good and poor creditworthiness – this is no more than fair, perhaps even fair.


Debt collection by financial locusts

Another game played by some renowned savings banks and private banks is the bundled sale of credit claims against their own customers to financial locusts. Many a medium-sized company has had to experience how this has then provoked a loan termination or, according to the impression, almost without reason – but not without justification – simply because, according to reports, the management had decided to do so. This does not even have to be due to the creditworthiness of the debtor, because the indiscriminately quickest possible loan termination is often part of the concept of profit maximisation for the loan purchase from the outset. This is because the profits are realised as quickly as possible and the capital is available again for new credit purchases – and the profit-reducing costs of ongoing credit monitoring are also saved in the case of indiscriminate credit termination.


After a brief visit by smartly dressed gentlemen from the “Moscow debt collection industry”, this kind of approach leads to insolvency or company liquidation, especially if the credit rating is poor. Experts know that a debt restructuring to another bank often means months of lead time – regardless of how good the credit rating actually is.


Insurers also pass on risks

It is customary in the industry for some primary insurers who have promised to bear the credit risk of their customers to share this risk with other insurers, which the experts then refer to as reinsurance against partial passing on of the insurance premiums. Here, too, the SME does not need to be asked if the additional contractual partner brings in his additional expertise in even more sophisticated credit assessment, to everyone’s benefit.


Banking secrecy, insurance secrecy and data protection offer no protection

The sale of credit claims against primarily commercial customers is regularly prevented neither by data protection nor by banking secrecy, which is not regulated by law (BGH ruling of 27.02.2007, Ref. XI ZR 195/05). Better protection can be provided by individual agreements which, for example, can prevent only the claim from the land charge being asserted in full plus interest at a later date – even if the loan has already been largely repaid. Otherwise, in case of doubt, the customer would first have to take action himself and file a lawsuit in the event of such a splitting of the loan claim and the loan collateral in the land register. An individual agreement, which is not only negotiated but negotiated in the legal sense, will change the legal situation in favour of the borrower in the long term – often, however, the credit customer is not even aware of the disadvantages of general terms and conditions.


Federal Supreme Court (BGH) protects bank customers

In its ruling of 30.03.2010 (Ref. XI ZR 200/09), the Federal Court of Justice (BGH) decided that in the event of the sale of a land charge, the new owner of this claim in rem must also enter into the security agreement with the original bank. This means that the debtor is once again entitled to all defences in this respect, but the credit customer can in fact also not defend himself against a changed business policy or a non-renewal of credit agreements.


Until this decision of the Federal Court of Justice or the Risk Limitation Act 2008, the game could run in such a way that the house bank had “sold” the land charge, whereupon “Moscow Debt Collection & Co.” could insist that e.g. 100,000 plus 18% interest was in the land register, and the borrower could not counter the restrictive security agreement.


When the borrower then asked his bank to clarify this, an answer came along along the lines of, “We have already sold your real loan debt to another financial locust – why don’t you turn there? From the customer’s point of view, his debt would have doubled, split between two new interlocutors. Sorting such things out requires patience and a war chest.


In 2008, the Risk Limitation Act stipulated that there is no bona fide acquisition of the land charge without a defence. The borrower can therefore hold this security agreement against the purchaser of the land charge. A previously possible acquisition of the land charge without objection in good faith due to lack of knowledge of the security agreement is now excluded by § 1192 Ans. 1a BGB is no longer possible.


However, the customer continues to bear the risk of a costly legal dispute with the purchaser or purchasers of the receivables. The number of unlucky people is determined by the business policy of the banks. If need be, bankruptcy may loom – often it just comes sooner and with less damage.


Risk Limitation Act only protects consumers directly

Since 19.08.2008, contract assumption by credit purchasers can no longer be effectively agreed in the small print if the customer is a consumer. Start-ups also regularly belong to this group of people. In other respects, i.e. in particular in the case of merchants, it is possible to agree a prohibition of assignment for the loan taken out, § 354a II HGB. In any case, it is advisable to spread the risk and, as a borrower, to provide appropriate safeguards to protect yourself from less reputable debt enforcers. Notice periods for loans should correspond to the lead time to be applied for debt rescheduling.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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