KBC BANK Ireland has questioned why mortgage debt write-offs in out-of-court settlements were being proposed while banks were being encouraged by the Central Bank to devise their own solutions with struggling borrowers.

Chief executive John Reynolds said the Government’s proposals would encourage customers to seek debt write-offs under the new personal insolvency arrangement rather than agree case-by-case deals offered by their lenders.

“It just becomes the default scenario – it will become the option that people will gravitate to first rather than sitting down with their banks to sort things out,” he said.

Mr Reynolds was speaking as KBC said that losses had widened to €269 million for 2011 from €171 million the previous year.

Arrears of 90 days or more on KBC’s home loans rose to 12.6 per cent at the end of 2011 – which Mr Reynolds said was in line with the industry average – from 7.3 per cent a year earlier.*

Mr Reynolds said the bank was working out medium-term debt resolution measures for customers as directed by the Central Bank.

He ruled out debt forgiveness under these measures, saying that it would be difficult to manage who was eligible for write-offs and that it would lead to heavier losses.

“We don’t see it as part of the regime,” he said.

“We will struggle to administer it where one borrower could be eligible and three others down the street would not.”

Losses rose at KBC as it took an impairment charge of €510 million to cover bad debts, down from €525 million in 2010 as mortgage arrears remained high and commercial property values declined.

KBC has taken an accumulative bad debt charge of €1.3 billion, about 8 per cent of its €16.7 billion loans, since the start of the crisis.

About 60 per cent of the charge relates to KBC’s €4 billion commercial loans, which includes €1.9 billion of commercial property loans.

The bank has mortgages of about €13 billion, a share of about 10 per cent of the market.

Mr Reynolds said the bank would take a capital injection from its Belgian parent this year for the first time since the start of the crisis to cover losses after the parent converted almost €300 million of subordinated debt to its Irish subsidiary into equity capital.

Even under a worst-case scenario on expected losses in 2012, KBC would require only a “moderate sum”, said Mr Reynolds.

“Our view for 2012 is that we are going to see more impairments – it is hard to say whether it will be lower than 2011.

“Our business planning is that 2012 will be something of a watershed year, and that 2013 will see substantially better results.”

* This article was amended on February 10th, 2012, to correct a factual error.