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The major problem of non-performing loans

Banks in Cyprus could secure the collection of significant parts of loans that are currently not being serviced by managing their non-performing loans more efficiently as Dr George Mountis explains.

non-performing loansTHE CENTRAL Bank of Cyprus (CBC) started releasing data on non-performing loans (NPLs) of both commercial and cooperative banks in June 2013. Ever since, NPLs as a percentage of total credit facilities continue to rise.

However, although they rose from 30.6% in June 2013 to almost 51% in November 2014 (latest available data), something that corresponds to over €7bn of additional non-performing debt, NPLs restructuring has been very slow with the percentage of restructured on total non-performing loans not having exceeded 12% during the aforementioned period (CBC, 2015).

More in particular, as of late November 2014, only about 11.1% of NPLs, equating to loans worth €3.1 billion, had been restructured. As far as credit facilities to legal entities (mainly corporations) are concerned, the construction industry was the one to display the highest restructuring rate; by the end of November, 25.3% of the sector’s non-performing loans had been restructured. It should be noted that Construction displays the highest percentage of NPLs with 78.7% of the loans granted to corporations active in the industry not being serviced. The NPLs to developers and contractors that have been restructured account for over €1.4bn representing therefore more than 46% of total NPLs restructured. High restructuring rates have been recorded in the Transportation and Health industries exceeding in both cases 30%. Restructured NPLs in the real estate and tourism (accommodation & food services) industries reached 15.6% and 16.1% respectively.

Credit facilities to private individuals, of which more than half (51.7%) are classified as non-performing, the average restructuring rate reached 8.3%, 9.9% for housing and 6.6% for consumer loans. Of the c. €4.3bn worth loans granted for the purchase or construction of owner-occupied immovable property that are not being serviced, only €378mn had been restructured by the end of November 2014.

Loan restructuring refers mainly to the extension of their repayment periods, and/or ‘temporarily’ decreasing monthly instalments. In some cases, restructuring involves decreasing interest rates or waiving part of the capital and/or the interest due. Moreover, the complex procedures that need to follow in order to proceed with loan restructuring are considered to be an obstacle to their effort; for this reason various stakeholders have already submitted a demand to the Central Bank of Cyprus asking for the simplification of the process. Finally, the approval of a bill for property divestment and of an appropriate insolvency framework are also believed to be critical for the acceleration of restructuring rates within 2015.

Banks could secure the collection of significant parts of loans that are currently not being serviced (and, therefore, the increase their revenue and liquidity), by managing their NPLs more efficiently. A more effective management approach comprises the restructuring of loans that are classified as non-performing but are still considered ‘viable’. On the other hand, there are no obvious benefits resulting from the delay of the restructuring process; quite to the contrary, the danger of a new crisis in the Cypriot banking system is posed by the accumulation of huge amounts of NPLs in it. NPLs therefore act as an obstacle for the recovery of local economy.

The ‘new’ Bank of Cyprus (and the other recapitalised local banks) can contribute to growth by granting low interest rate loans and proposing ‘smart’ NPL restructuring solutions. Cyprus’ level of NPLs is the highest among European countries. For the economy to be able to return to and sustain growth, household and corporate debt need to be significantly reduced.

Banks should promptly proceed with writing-off default interests and overcharges on overdue loans including interest on capital that debtors will never be able to repay mainly because of previous usurious charges imposed by the financial institutions. A few months ago, six years after its banks went bankrupt, Iceland proceeded with a haircut of household debt by subtracting value of housing loans mainly. It is estimated that this initiative will directly benefit c. 85% of households and that write-offs will near €25,000 per debtor. It is important noting that Icelandic households and corporations never reached the levels of lending of their Cypriot counterparts.

Finally, although deposit interest rates have been significantly de-escalated, existing and new lending rates remain at artificially high levels and have not been proportionally reduced. ‘Fuelling’ businesses with new but notably cheaper money is a necessary move to reboot the economy. The Government should search for a solution for the huge debt gathered for households and businesses and consider (under specific terms and conditions) a ‘private debt relief’ programme having of course calculated its impact on local banks.

Dr George Mountis
Managing Partner
Delfi Partners and Company
T: +357 22 503152 | D: +357 22 503182
M: +357 99 494142 | F: +357 22 503113
E: gm@delfipartners.com
W: www.delfipartners.com

Readers' comments

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  • Scruffy says:

    @ MartynG – Having dealt directly with the Debt Recovery Dept of B.O.C. I can tell you that to “kick the can along the road for a few more years” is exactly what they intend to do. Certainly, in the case of outstanding developer loans, they still believe that the properties that were used as collateral will eventually redeem their losses in the long run, so they intend to wait it out and do nothing until the market recovers.

    Believe me, talking to these so called professionals is an eye opener. They are clueless.

    When I pointed out that, unless I receive a waiver re a hidden developer loan, there was no point in me continuing to pay my mortgage, he said that should I default he would repossess the property. I replied that the balance of my mortgage was far higher than the present value of the house and that I had no other assets that he could pursue.

    His reply? Shrugged his shoulders.

    I then said, your persistence in refusing a waiver would indicate that you intend to take the house eventually anyway.

    His reply? He shrugged his shoulders.

    It is important for people to realise that, unlike e.g. the UK, we are not dealing with professional, qualified people here in Cyprus. Trying to analyse the situation is futile as the normal rules of finance, (or indeed logic)do not apply.

  • Steve says:

    The rate at which NPLs are rising is astonishing. I suspect that many defaulters are taking advantage of the banks’ reluctance to take forced possession because properties are not selling and they would be taking on liabilities rather than saleable assets. That may all change soon as investment companies see the potential and come looking for bargains (see Cyprus Property News, 23 January), which make possession by the banks a more feasible option. As soon as the risk of loss of property increases, so will the inclination of defaulters to pay up.

  • MartynG says:

    What absolute tales of Woe flow from this detailed Report, useful if, itself, a little fuzzy in places, but it does show how absolutely lethargic the banks have been in addressing, discussing and, where possible, rescheduling/restructuring customer borrowings.

    One can really only ask WHY the banks are being so pedestrian in addressing their massive numbers and amounts of NPLs. Probably because many of the loans, overdrafts etc didn’t adhere to standard banking practices (loan-to-value parameters, ability of borrowers to repay, existing customer debt burdens etc.) – and as to Risk Analyses, individual and connected loans/overdrafts etc, it looks like nobody even bothered to look at those – either individually or sectorally.

    The entire banking cultures and operating parameters in this country need a Total Revision, at Sector, Board, Management as well as regional and local levels. This needs to come from the very Top, I.e Government and Regulators. And If they don’t have the tenacity to do this then the Troika must surely ‘put the proverbial boot in’ and ‘Require’ the government, regulators, banks to do this – instead of Simply ‘kicking the proverbial cans down the road’ for another few years, hoping somehow that ‘ something will, as usual come up’!!

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