Italy drops latest bad loan proposal from PM Meloni's party

Italian Prime Minister Meloni speaks during the Budapest Demographic Summit in Budapest

By Valentina Za and Giuseppe Fonte

ROME (Reuters) -Two parliamentary committees have axed the latest proposal by Italian Prime Minister Giorgia Meloni's party to protect borrowers if they fall behind in repaying their bank debt, easing concerns for investors in the country's 307 billion euro ($328 bln) bad loan market.

Italian lawmakers had upset bad loan investors last month by proposing to give borrowers the right to repay their original loan at the discounted price at which the creditor bank sold it on, plus a 20% premium. To dispel concerns, Meloni said on Sept. 7 that there were no measures "on the launch pad" for non-performing loans.

However, lawmakers from Meloni's own Brothers of Italy party put forward to upper house Senate this month another rule that would have made it easier to apply their initial proposal.

Lawmaker Renato Ancorotti, one of the promoters of the measure, told Reuters the latest amendment aimed to help borrowers to buy back loans.

But the committees ruled on Wednesday the proposal, which would be introduced by amending a government decree that in August imposed a surprise one-off tax on bank profits, was "impracticable" under the rules of the Senate.

The discarded changes would have made it obligatory in banks' sales of bad loans to include in contracts the price of individual loans, even if they were sold in bulk.

Investors would have been unable to act in court to recover soured loans from borrowers if the contracts did not comply with the new requirements.

In a bulk sale of credits, the relevant price for the market is that of the overall portfolio, which is an average of the single loans' prices.

Portfolios can comprise thousands of loans, which would make it too onerous to price each individual loan properly.

Three bad loan investors said the market had not expected the latest measure from Brothers of Italy to go through but it had still unnerved investors.

Attempts to change the rules of the game with retroactive effect are perceived as damaging, the people said requesting anonymity given the sensitivity of the issue.

The amendment set a three-month limit to amend transactions that have already taken place, but investors said it was impossible to retroactively price single loans in a meaningful way. ($1 = 0.9361 euros)

(Editing by Keith Weir)