The latest Financial Stability Report published by the Central Bank of Cyprus (CBC) states “Credit Acquiring Companies (CACs) must possess the tools available to credit institutions, in order to be able to provide prompt, effective and viable solutions to their borrowers and/or to proceed to the recovery of underlying collateral, under certain circumstances”.
The CACs must also be willing to recommend fair restructuring solutions which will not make things worse for both borrowers and the CACs themselves. Unfortunately, some companies that recently entered the non-performing loan market in Cyprus do not implement such ‘fair’ practices, as they seem to recommend solutions that lead both the borrower and the CAC into a worse financial position. These solutions are the result of employee errors/misjudgement and/or lack of proper analysis of the borrower’s case to understand the dynamics and the time-horizon to recover.
The report published by the Central Bank of Cyprus also states that “using methods such as loan sales to CACs in an attempt to tackle the Non-Performing Loans (NPLs) problem, contributed to the clean-up of credit institutions balance sheets. However, these loans remain part of the private debt of the non-financial sector and consequently, a heavy burden for the economy”. Therefore, “the reduction of NPLs and the proper restructuring of loans in order to become performing constitute great challenges for businesses, households, the banking sector and the economy”.
To emphasize the importance of the problem and the need for solid solutions let us review some data mentioned in the report. At the end of 2021, CACs managed 80,192 loans with a total contractual value of €19.2 billion – an amount that is nearly equal to Cyprus GDP. At the same time, the value of collateral was 52% of the gross book value, of which 32% was related to the borrowers’ primary residences. Looking at these data, we do realize that thousands of primary residences are at risk of foreclosure, especially if CACs do not show goodwill to find viable solutions. This could justify the Parliament’s recent decision to suspend foreclosures through October (which by the way does not solve the existing problem).
Recently, the Greek Minister of Finance, Christos Staikouras, criticized commercial banks and CACs operating in the country for not utilizing out-of-court settlement adequately, and asked for more flexibility and better solutions for borrowers. In Cyprus, the Central Bank often highlighted the need for the provision of solutions – mainly to viable borrowers – without delays or extra charges, following a transparent process and showing goodwill. CACs should not forget that they now play a vital part in the Cypriot economy, since they are called to manage the most vital legacy problem of the Cypriot economy, i.e. the private debt of households and businesses.
As mentioned in the Ministry of Finance Annual Report 2021, “the percentage of NPLs against the total number of loans remains higher than the European average, despite the progress made, and it is still considered as one of the biggest challenges of the banking sector, along with household and business overborrowing. The problem affects the capitalization, profitability and future prospect of the economy in general”. An amendment to the CBC’s Directive on Authorisation and Supervision of Credit Acquiring Services was made just a few days ago, focusing on matters such as organisational structure, lines of responsibility, internal controls, effective restructuring of non-performing credit facilities, appropriate monitoring and handling of complaints and, above all, fair treatment for borrowers and data protection. A landmark decision from the CBC, which we hope, will ensure the swift adoption of the amended directive.
Therefore, CACs – and especially some which have recently entered the Cypriot market – should start implementing best practices, as their goal should not be just to make profit for their shareholders, but also to contribute to the improvement of the competitiveness of the Cypriot economy and to help sustain the social fabric.
All comments are Dr. Mountis’ personal opinions and do not represent the company he works for in any way.