THE EUROPEAN COMMISSION has sent a warning regarding the course of debt restructuring in the Cypriot banking system, saying that “efforts to restructure non-performing exposures have not yet shown tangible results.”
Financial institutions have stepped up their debt restructuring efforts, but the results have been mixed so far, the Commission report said, adding that the share of restructured loans increased during 2015.
“However, the ratio of non-performing restructured loans to total loans increased as well, suggesting that many restructuring operations are not sustainable and are non-performing,” the Commission underlined.
In absolute terms, the rise in restructured loans was almost fully matched by that of non-performing restructured loans.
By September 2015, the restructured loans to companies stood at 24.6%, while performing loans were at 6.8% of the total loans.
In the same month, non-performing loans to households were at 17.5% and restructured loans at 7.7%.
In addition, the Commission stressed that the enhanced restructuring efforts are still falling short of the restructuring targets set in agreement with the Central Bank of Cyprus.
“On the other hand, banks’ performance is in line with targets set for early arrears and new non-performing loans. This suggests that banks have become more pro-active in preventing early arrears from turning into bad loans” it noted.
The Commission said that “existing backlogs and inefficiency in the justice system are likely to slow down the resolution of the non-performing loans”.
To bring non-performing loans down to sustainable levels, the infrastructure (auction rooms) and institutions (number of auctioneers and insolvency practitioners, insolvency service) have yet to be adequate and become operational, the report said.
“Despite the updated directive on loan provisions and the increased focus on the debt servicing capability of borrowers rather than on collateral, a large share of loans still end up non-performing” according to the report.
Between 20% and 40% of loans granted in the course of 2013 and 2014 were non-performing by the end of the year in which they were granted, it said.
“This highlights the challenges that exist in identifying viable borrowers and investment projects in the context of excessive private sector indebtedness”.
The Commission said that the creation of a credit register in 2015 might help banks avoid lending to already troubled borrowers, although it would not help assess their repayment capacity, as it only collects data on liabilities.
However, it stressed that “there are now increasing pressures for banks to increase lending, potentially under-pricing risk, as ample and still rising liquidity is penalised by the negative rates on the ECB deposit facility”.
According to the Commission, full implementation of the foreclosure legislation has been delayed by slow progress in selecting locations for auctions, but the first auctions are expected to be held from the second quarter of 2016.
As regards personal insolvency, by end-February 2016 490 Debt Relief Order applications had been made, and there were only 8 requests for Personal Insolvency Arrangements.
“There has been a commitment by the Cypriot authorities, in the context of the economic adjustment programme, to conduct an assessment of the functioning and of the first experiences of the private sector debt restructuring and foreclosure frameworks, with the aim of defining an action plan of modifications to those frameworks to correct any deficiencies, but as of mid-March 2016 such an assessment had not been initiated,” it said.