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Deposit interest rates fall while loan interest rates rise

Although interest rates banks in Cyprus are paying their depositors have plummeted in recent times, the interest rates they are charging borrowers are increasing according to the European Central Bank.

ACCORDING to new data provided by the ECB (August 2013), despite the fact that interest rates for deposits in Cyprus have decreased dramatically (something that should have been done a long time ago), loan deposit rates for households and businesses are on the increase. 

Data published by the ECB indicate that the great reduction of deposit interest rates at the rate of 2% has not brought about any reduction to lending costs due to the fact that lending costs have increased to a significant extent. Unfortunately, it has been proven that announcements made by banks regarding reductions of interest rates for loans were not true.

The ECB reports that interest rates for business loans have increased at the rate of 6.50% (in July 2013) in relation to 6.35% in June 2013. It is worth mentioning that such interest rates are the highest in the Eurozone, much higher than those in Greece (5.80%) (in Greece, interest rates for loans for large and small and medium enterprises were slightly reduced from 5.84% to 5.80%). It is remarkable to note that interest rates for business loans are almost 3.50% higher than the average interest rates for business loans in the Eurozone (3.30%) (ECB 2013).

Furthermore, interest rates for housing loans in Cyprus increased from 5.37% (in June 2013) to 5.60% (in July 2013). According to data provided by the ECB (2013), the average interest rate for housing loans in the Eurozone is 3.28% – much lower than the interest rate for our own housing loans.

Such increase in the interest rates for loans is noted at such a time when interest rates for deposits are on their downfall (they are at their lowest level since 2008). Interest rates for new deposits in Cyprus have been reduced from 2.34% to 2.24% since June 2013 and from 4.50% in the same month in 2012.

There are certain possible reasons for such increase in interest rates. Since new loans are only a few, it seems that this increase emanates from existing loans. When banks ‘restructure’ a customer’s loan, such ‘restructuring’ is usually accompanied by something in consideration: the increase of the interest rate (‘re-pricing’). Such increase (even nowadays) is often set at the rate of 1-3% (this depends of course on the level and basis of the existing interest rate). As a result of these restructurings, households and businesses are unable to repay their loan instalments which already bear high interest rates (the highest in EU) as stated above.

Institutional stakeholders should wonder how large and small-to-medium businesses will be in a position to repay loans which bear interest rates at the level of 7.0-9.5%. This policy has affected and still affects Cypriot households and businesses. As a result, non-performing loans in the banks’ portfolios are on the increase and loan restructurings which are still made to this day have the effect of increasing interest rates (bankers will ‘correctly’ attribute the particular interest rate increase to the “increased” risk assumed by the bank for restructuring the particular loan).

We believe that this is the time for making radical changes – the announcements made by Banks to the effect that interest rates will be reduced by 0.25%-0.5%, are not sufficient in order to assist over-indebted households and businesses to breathe.

We are in need of the immediate intervention by the government as well as quick reforms…

Dr. George Mountis
Managing Partner
Banking | Wealth & Trust | Asset Management

The Parthenon Partners & Co

Tel: + 357 – 99 49 41 42
Email: george.mountis@theparthenonpartners.com

Readers' comments

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  • AndrewK says:

    Dear Dr George,

    Thank you for taking the time to write something that actually makes sense as well as calling for some action.

    However, the only restructuring I can see on residential mortgages has been to add 2% to the banks profit margin. This seems to be the accepted way forward in Cyprus, that is, if not enough people are paying charge those that are even more, however, It’s an economic fact of life that there is a limit as to how much you can charge for goods or service and still expect people to pay!

    If the bankers want an indication of the longer term result of this they should walk along Limassol sea front and see the number of empty premises and ‘Business (liability) for sale signs’. You cannot overcharge and expect people to continue to do business with you, worse still, you cannot put out a menu that states a coffee is €1.50 and then charge €3.50 after it has been ordered, add another charge for receiving the payment and then another charge because the money was brought from abroad!

    But that is what the banks have done with the mortgages. An agreed profit margin of 1.5% was increased to 3.5% after the agreement was signed! They also make a charge when you pay them and then add another annual charge on top of that. Once people realise what can and will happen they will not want to do business on such a basis and perhaps they won’t even consider buying property in Cyprus.

  • Martyn says:

    Friday 13th seems to have been a good day to highlight these anomalies. But then after the ‘Black Swan’ events around mid-march should we really be surprised, shocked even? One major bank has ‘gone under’ – well to all extents and purposes, the visible rump of it merged into BoC, who themselves, it has been recognised, have numerous structural and operational problems that will likely take years to eradicate/resolve. And the Co-op bank is now also under critical examination and we hear Horror Stories there may well emerge soon.

    Firstly, who given a choice would Deposit with Cyprus banks? – ‘once bitten, twice etc’, and those who might will want to see much higher ‘Reward v Risk” reflected in the rates currently being offered. Similarly, George M will surely be right, urgent reviews of the banks’ loan books will have indicated generally High Risk, especially on the, we gather, very high numbers of Non-Performing loans, and therefore higher borrowing and penalty rates applied.

    Then, sadly, Risk amongst many of the country’s Small and Medium businesses must now be at an all-time High – a lot have already folded, many more we learn are ‘on the cusp’. The national economy – having finally responded to the strictures imposed by Troika via MoU – is in a sharp, frightening Decline as a result of years of Denial (that there were any problems, that structural, banking and professional practices and standards needed overhaul).

    Perhaps easy to say that the new Government should ‘intervene’, but how?. Much of the country is ‘running on empty’ , the banks are in early-stage Intensive Care, there are a thousand and one things requiring attention, not least the over-staffing and low productivity of the massive Public Sector.

    Even with the most recent Troika funds release, and those scheduled – subject to ‘Good Behaviour’ – over the next two years, RoC hasn’t even reached the ‘end of the beginning’ stage yet.

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