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