By Jean Christou
EU AND IMF experts on Monday warned that restructuring of loans by Cypriot lenders was an “absolutely critical component” to the success of Cyprus’ bailout programme as they revealed that €19 billion was currently owed to the banks in non-performing loans (NPLs).
Speaking at a conference on Arrears Management and Loan Restructurings, organised by the Central Bank of Cyprus (CBC), Luis Cortavarria, adviser to the International Monetary Fund (IMF) said that the amount of non-performing loans currently stood at 46 per cent of the banks’ gross portfolio. This translated into €19 billion, or 120 per cent of the island’s GDP, he said.
“The banks need to recognise that some borrowers need to go into liquidation. Unfortunately that is the case in banking crisis,” he said. “Certainly the objective of this debt restructuring is to minimise those cases but at the same time the objective is to ensure that the borrowers staying in the market are the good borrowers.”
Filip Keereman, head of unit in the European Commission`s DG for Economic and Financial Affairs said household and corporate indebtedness in Cyprus was higher than all other EU countries, including Greece, Spain, Hungary, Ireland, Latvia, Portugal and Romania. He attributed this to the sharp economic contraction and the past poor supervision and governance in the banking sector.
“The banks are fragile and find it difficult to tackle NPLs,” he said, adding that in some case NPLs made up 50 per cent of loan portfolios in Cyprus. He said action was needed on several fronts – at the level of banks, borrowers and with regards to the legal framework.
“It is a difficult balancing act … we also need to respect the economic and social conditions,” he said.
Reiner Martin head of the ECB unit for the Cypriot financial sector told participants at the conference that debt restructuring was “an absolutely critical component” of the island’s bailout programme.
“The bank capitalisation and ability to resume lending is absolutely critical and this depends on maximising the value of NPLs,” he said.
Banks in Cyprus have so far been reluctant to chase down borrowers who are in arrears. Political pressure dictates they lay off homeowners, and major property developers, who owe billions combined, have warned that foreclosures would be catastrophic to a depressed market and the economy as a whole.
In his opening address to the conference, Central Bank governor Panicos Demetriades, who said arrears and NPLs in Cyprus were rising to unprecedented levels, said it was one of the most challenging issues currently facing the banking sector.
He said new directives from the CBC were designed to shift lending from asset based criteria (collateral) to « assessing the ability to repay ».
“Collateral should be just that, an added layer of security in case things do not evolve as expected, and should not be expected to be the primary source of repayment,” Demetriades said.
But he added that a focus on the human factor, especially in cases of homeowners, should remain. The emphasis now was on restructuring loans on the basis of fair pricing in order to achieve a viable repayment schedule which would assist the borrowers’ business and financial condition, contribute to economic recovery and safeguard the interests of banks, he said.
Dematriades said a reduction in the level of NPLs would result in lower provisioning requirements and this would contribute to the decline in interest rates in the long run, to the benefit of households and businesses.
“Unfortunately, for many years the banking sector in Cyprus, in common with some other countries, adopted poor risk and credit management practices, dominated by asset based lending, and an overexpansion of the real estate market,” Demetriades said.
Steps taken to address arrears should adhere to the CBC’s Code of Conduct for borrowers and creditors, with a case by case approach, he said.
“A distinction should be made by banks between those borrowers who are cooperative and willing to meet repayments in line with their financial capacity, and those who are able to repay but are unwilling,” said the governor.
Decisive recovery measures “should be deployed for able but unwilling clients”, he added.
All of the participants stressed that it would take time.
Cortavarria said in some Asian countries, which had tackled the problem, it had taken two years or more to see a reduction in NPLs, but he clarified that each country was different.
“We cannot copy-paste what happened in one country. We must learn from the mistakes made in each country,” he said. “The important message is that the task of cleaning up the banks takes time. It is a difficult task, there is no magic bullet for this but at least there is light at the end of the tunnel.”
Demetriades said that an assessment of the island’s credit institutions’ internal effectiveness, operational capacity, and arrears management policies, procedures and practices for the different sectors in the market would be conducted in the first half of this year.
The conference, which ends today, is covering strategies, treatment of borrowers, and legalities indepth.