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Loan rate cuts are a step in the right direction – BUT

The recent announcement by the island’s ‘big three’ banks to lower interest rates are a step in the right direction, but problems remain and these rate reductions are not enough as George Mountis explains.

DOES the interest rate deduction announced by the banks concern all loans? What are the associated implications?

The simple answer is NO! It concerns specific loan categories and products which can be found on the Banks’ websites. Customers are urged to speak to their banks and check whether their loans are eligible/ subject to this interest rate reduction. If they are not eligible to this reduction, then we insist that they should speak with their bankers and insist that their interest rates should be also reduced (they will have a hard time doing so).

This move towards the reduction of 0.25-1.0% in the lending interest rates of Alpha Bank, Hellenic and Bank of Cyprus is “good step” towards the right direction but it is not ‘good enough’. We would say it looks more like a decent marketing communications campaign rather than something that it will indeed make a difference in the borrowers’ repayment ability.

Today, the high interest rates that our households and businesses are paying form the ‘Achilles Heel’ of the Cyprus economy. All local banks need to further reduce interest rates in order for the loans to become more affordable and be aligned with the EU equivalent. However, as in any ‘free and open’ market, we need to avoid making legislative changes to accommodate the reduction of interest rates as their will be negative consequences associated with such a change.

Even today, when banks ‘restructure’ a customer’s loan, such ‘restructuring’ is usually accompanied an increase in the interest rate. This is known as ‘re-pricing’, which often involves an additional rate of between 1.0 per cent and 3.0 per cent, depending on the level and basis of the existing rate on the loan. This policy by all banks has to END! It’s unethical and most importantly it does not help neither the economy (households and individuals) nor the banks (artificially inflating profitability). This is the time to make radical changes. The announcements made by banks to the effect that interest rates will be reduced by 0.25% to 1.0%, are not sufficient in order to assist over-indebted households and businesses to breathe.

This reduction will have minimal (if no effect to borrowers) that are unable to repay their instalments. The interest rates for housing and business loans are the highest in EU. Despite the significant reduction of deposit interest rates by more than 3%, a reduction on lending interest rates in the region of 1% is not enough to make the difference. Also, banks should enforce this across most of their lending products and not specifically to the loans that are ‘over-priced’ (i.e. have higher interest rates). Borrowers are urged to continually monitor the interest rates and speak to their bankers for their eligibility regarding this interest rate reduction as stated above.

If we do not take immediate action today, the non-performing loans will continue to increase resulting in higher provisions on the banks behalf with catastrophic consequences for the whole banking sector and our economy.

If the bankers and the Central bank cannot resolve this issue immediately, then we are in need of the immediate intervention by the Government to resolve this issue, as well as quicker and effective legislative reforms which will have side-effects and additional consequences for our image as International Financial Centre.

Dr. George Mountis
Regional Managing Partner
Banking | Wealth & Trust | Asset Management advisory
P.P. (The Parthenon Partners) & Co
Tel: + 357 – 99 49 41 42
Email: george.mountis@theparthenonpartners.com
Web: www.theparthenonpartners.com

Readers' comments

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  • Gary Petrie says:

    Just got my answer from the Bank of Cyprus. “The reduction concern people that they own only one house. Holiday houses are excluded.”

    So if you have a holiday house loan in Swiss Francs where the banks have bumped up the interest rate without reason then your bank is still unwilling be reasonable. Probably the same bank that loaned money to your developer at high risk and now expects you to pay it back as well.

  • Hani Chehsiber says:

    very well said.

  • Martyn says:

    Absolutely right Ivan. This tiny reduction on ‘certain products’ is no more than a marketing massage, a smokescreen to keep those, mainly inside the banks – and their ‘chums’ – in 7th Heaven via the various questionable (at Best!) subsidised practices that have gone on. Not to mention the myriad of Senior Managers who received large < massive Bonuses (with taxes thereon) paid by their Employers, apparently!

    The present Unholy Mess within the Cyprus banks should be forensically analysed by the present Government together with non-aligned external specialist organisations so that the massive cultural and community problems across the banking/financial and associated legal and property development sectors can be put fully under the Spotlight with a view to introducing severe remedial actions and a re-addressing of the roles of banks, corporate and 'community' in this country.

    Can? Will? They do it? Yes to the 1st, very unlikely to the 2nd. And thus the problems will drag on amidst much 'ducking and diving' by those closest to the problems, and the longer the downward spiral will, sadly, continue.

  • Ivan says:

    Dr. George seems to sum it up very well, it’s a marketing exercise to create a smoke screen for unethical behaviour.

    The banks ADDED 2% to housing loans and claimed they had to do it to pay the deposit rates necessary to attract business. This was unethical and not what borrowers agreed to, it was also an act of sheer stupidity. It has caused massive problems with foreign currency loans (ie. Swiss Franc), payments should have reduced as the LIBOR rates dropped. The LIBOR reduction more than offset the exchange rate changes and mortgage payments would have actually reduced. Instead the banks couldn’t work out that if they DOUBLED the interest rate it might cause problems with repayments….. so they doubled the rates charged.

    Of course the banks directors needed to maintain deposit rates of 6% as they could borrow multi millions (much of it unsecured) and repay at 2%. That’s €40,000 (4%) interest they get for every million they BORROW! No wonder they had to add 2% to everyone else’s loan charge.

    They have now dramatically reduced the deposit rates but are not removing the ‘extra’ 2% profit they put on the loans, nor repaying the overcharging.

    I would say education is necessary on how to operate outside the Cypriot system of adding charges to compensate for their errors and corrupt behaviour.

    Would government intervention require the offenders being named and punished, if so that won’t happen, instead we might get another ‘marketing’ statement.

    It’s all done with ‘Smoke & Mirrors’ but after so many deceptions no one really believes it any more.

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