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Arrears and NPLs at unprecedented levels

For many years the banking sector in Cyprus adopted poor risk and credit management practices, dominated by asset based lending, and an overexpansion of the real estate market.

ARREARS and non-performing loans (NPLs) are rising to unprecedented levels in Cyprus, Central Bank (CBC) Governor Panicos Demetriadies said on Monday.

Speaking at a conference on Arrears Management and Loan Restructurings, organised by the CBC with Irish and EU experts, Demetriades said the IMF December 2013 Cyprus Second Review had provided valuable lessons from Ireland and Iceland as regards NPLs.

“As in the case of Cyprus, these countries entered the crisis with large private sector indebtedness accumulated in the decade preceding the crisis,” said Demetriades.  He said that private sector indebtedness peaked at over 500 per cent of GDP in Iceland, and 300 per cent in Ireland.

“By comparison, private sector indebtedness stands at 300 per cent in Cyprus. One should however place this in context and recognise that while the numbers are high, the problem can be addressed and defused once appropriate and targeted measures are taken, such as a targeted case-by-case approach to debt restructuring, an effective arrears management framework, and the strengthening of the legal framework,” said the Governor.

He said arrears management and loan restructuring was one of the most challenging issues currently facing the banking sector in Cyprus in its path to the restoration of financial soundness.

A reduction in the level of NPLs would result in lower provisioning requirements and this would contribute to the decline in interest rates in the long run, to the benefit of households and businesses.

Banks had started deleveraging and would focus their operations on domestic core banking products, said the Governor.

“Unfortunately, for many years the banking sector in Cyprus, in common with some other countries, adopted poor risk and credit management practices, dominated by asset based lending, and an overexpansion of the real estate market,” Demetriades said.

“The consequences of such practices can be disguised in periods of an expanding booming economy, even appearing as successful while real estate prices are rising, demand remains strong,  and income growth targets supersede the basic principles that should govern any basic business or lending transaction – the ability of borrowers to repay their debts.”

New directives from the CBC, he said, were designed to shift lending from asset based criteria (collateral) to assessing the ability to repay.

“Collateral should be just that, an added layer of security in case things do not evolve as expected, and should not be expected to be the primary source of repayment,” Demetriades said. But he added that a focus on the human factor, especially in cases of home owners, should remain. The emphasis now was on  restructuring loans on the basis of fair pricing in order to achieve a viable repayment schedule which would assist the borrowers’ business and financial condition, contribute to economic recovery and safeguard the interests of banks.

Demetriades said loan restructuring provided an opportunity for banks to strengthen their liquidity and profitability where an improvement in debt servicing performance can be achieved.

Steps taken to address arrears should adhere to the Code of Conduct for borrowers and creditors, with a case by case approach, he said.

“A distinction should be made by banks between those borrowers who are cooperative and willing to meet repayments in line with their financial capacity, and those who are able to repay but are unwilling,” said the Governor.

Decisive recovery measures “should be deployed for able but unwilling clients”, he added.

The CBC boss said that an assessment of the island’s credit institutions internal effectiveness, operational capacity, and arrears management policies, procedures and practices for the different sectors in the market would be conducted in the first half of this year.

The conference, which ends on Tuesday, will cover strategies, treatment of borrowers, and legalities.

Nonperforming loans in Cyprus at unprecedented level

Readers' comments

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  • @Nicolas Slade – You’ll need to speak with the bank and come to an arrangement. There’s an article at Bank of Cyprus loan restructuring appeals that you may find useful.

  • Nicolas Slade says:

    I had an overdraft in the Laiki bank and after the banks closing the debt went to Bank of Cyprus and they have contacted me to pay the loan back as I am willing to do. Is there a time allowance on how long they will allow how much I am allowed to pay back monthly I am 65 and not working.

  • Peter Davis says:

    The Cyprus Mail puts the total for NPL at €19bn

    There are 800,000 of ‘us’ on the Island

    I work it out we owe €23,750 each or €47,500 as a couple.

  • Andrew says:

    They’re back! Troika inspectors to look at NPLs, capital controls

    The boys are back in town. When they take a look at NPLs do they take into account how long these debts have remained unserviced for. Let the Troika agree to these loans being written off and let homebuyers have their title deeds please.

  • Clive of Payia says:

    Russia may possible step in and buy these NPL’s at a discount in return for use of the Paphos military airport an berths at Limassol docks plus other goodies like the rights to any gas an oil found offshore. They virtually control the BoC so should be any easy decision.

  • Peter Davis says:

    @John

    As a South African Cypriots said to me when I first arrived in Cyprus. “They only expect to deal with you once, so have to maximise their profits”.

    No thought of return business. No customer base. No premises sold with “Good Will”.

    It costs 10 times more to attract a new customer than retain an existing one (ICM figures)

    In the UK a customer is retained through loyalty. Customers are encouraged to give feedback, (even negative) as part of a learning system, and is not considered a threat or a form of bad attitude.

    Its a different mind set.

  • Janner says:

    I’m sure we will all be talking about the same thing next January. The Cyprus Government don’t want to deal with it. The EU doesn’t want to. Until Germany pulls the plug on funding (which it won’t) the status quo continues.

  • andyp says:

    @jjames. Prison sentences would be more appropriate.

  • John Swift says:

    Some things never change it would appear. I was stationed in Cyprus in the mid 60s, you expected to be ripped off, it is the culture whether you like it or not.

    Your landlord/lady would promise to reduce your rent after 6 months, we asked for the reduction which was as normal refused until we found another property then it was “no no I drop your rent”.

  • jjames says:

    We’re reading more and more in the last few weeks about what needs to be done. Is the s*** really about to hit the fan?

    I trust the government is working flat out, 24/7 towards solving this crisis!! BANKERS, DEVELOPERS and LAWYERS need to be brought to book as a matter of urgency.

    e.g. Viviane Reding is hot on lawyer training within the European Union!

    How about some retrospective, remedial workshops for this bunch of crooks?!

  • Steve.R says:

    Why doesn’t the title deeds issue move as quickly as the NPL cases. There again at this stage its only hot air.

  • Steve says:

    Hold on a moment! “Private sector indebtedness stands at 300 per cent in Cyprus.” Prof Demetriades used the words “peaked at” with reference to Ireland and Iceland, so we don’t know if the numbers are still going up in Cyprus. The Cyprus 2012 GDP was almost €18 billion, so the debt is €54 billion and maybe going up. This indebtedness falls at the government’s feet, because they are committed to guarantee the banks’ financial viability, yet we are hearing nothing about public spending cuts such as the pension cuts, social security cuts, reduced public services and civil service redundancies that happened in Greece and Ireland.

    Does the government really expect the banks to recover €54 billion by rescheduling debt repayments? Do they know something we don’t, such as guarantees from the European Banks to save the Euro if Cyprus goes under?

    It couldn’t actually get worse, could it?

  • Denton Mackrell says:

    Fine rhetoric from Prof Panicos and not a hint of his personal responsibility for the mess we are in. Where was he when the Cyprus debt and NPL mountain was escalating out of control in 2012?? Playing on his abacus?

    This economics professor with no banking experience was parachuted into the CBC Governor’s job by the previous President. He remains AKEL’s ideological agent seeking to thwart proper banking management as it conflicts with the old style communist approach to banking which, in the former communist states, have long been discarded and discredited – but not by AKEL in Cyprus. No wonder the present government wants rid of him but, no thanks to the protection of the ECB, we are still cursed with his presence.

  • K says:

    I received my latest letter from the bank saying I will be classified as non-cooperative.

    With the utmost respect to all types of victims, I compare my relationship with the bank as a one-sided abusive relationship, with the associated mental stresses. As with most abusers, the victim is blamed and the slightest contact results in false promises to change, and reversion to the way it was, or worse.

    But maybe the abuse is unforgivable.

    It’s never too late to walk away, with or without the ‘divorce’ lawyers.

  • Andrew says:

    Clearly and deliberately the banks did not care one jot about the borrowers (developers) ability to repay “their” debts. These unscrupulous banks always intended to use innocent, unwitting buyers as guarantors.

    This whole shambles was and remains a conspiracy between Banks Lawyers Developers, Real estate agents and Land registry. Their greed has caused this suffering for everyone in Cyprus.

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