By Elias Hazou
The Central Bank (CBC) said on Tuesday it plans to lean on commercial banks to lower their lending rates, currently the highest in the eurozone.
Speaking to MPs at the House institutions committee, CBC governor Chrystalla Georghadji said an announcement on how this would be done should be expected over the next two weeks.
The news was welcomed by the Cyprus Consumers Association, who in a press release said they hoped the rates reduction would be substantial if it were to have a positive impact on consumers.
It’s understood that the CBC’s technocrats have been given a fortnight to come up with recommendations on how to get banks to drop their rates.
Georghadji did not give away too much, except to say that interest rates – the cost of money – are linked to the amount of loans in arrears.
The higher the loans in the red, the more reluctant banks are to grant new loans and thus the
cost of borrowing remains high.
The Central banker said she was disappointed with the banks’ slow pace in restructuring loans.
According to data recently furnished by the CBC, by end-September 2014 just 12 per cent of non-performing loans (NPLs) had been restructured.
Georghadji said the banking regulator plans to link the issue of loan restructurings to the banks’ capital buffers, as leverage on lenders to speed up their loan consolidation.
“Let them [the banks] hurt when they fail to restructure loans,” she said.
Georghadji qualified her comments, however, adding that the CBC wants “viable restructuring, not fast restructuring.”
But the success of the endeavour depended on the goodwill of lenders and borrowers alike, she said.
Both she and finance minister Harris Georgiades stressed it would be unwise to let off the hook guarantors of debt, an idea floated by some recently.
“If this happens then with mathematical certainty we shall be forced to turn to taxpayers, to shareholders or to savers [to bail out the banks],” Georgiades said.
About 48 per cent, or €29.2b, of all loans are non-performing, a huge number that is a drag on the economy, and the single largest challenge facing the financial system according to Cyprus’ international creditors.
Moreover, data circulated in parliament show that as much as one-fourth of all loans are not backed by adequate physical collateral. Of the some €60b in outstanding loans in the system, €15b lack sufficient collateral.
The banks’ collateral exposure is primarily due to the drop in mortgage values amid the continuing economic slump.
The majority of the exposure – some €9.7b – relates to loans classed as non-performing, the rest (€4.9b) to loans being serviced.
Bankers attending the House committee were grilled by MPs as to the accuracy of the mortgage valuations. It was a loaded question, with politicians wanting to probe whether banks are eyeing properties for repossession – a controversial issue.
Michalis Kronides, a senior official of the Association of Cyprus Banks, responded that lenders carry out property valuations for two purposes, namely for loan restructuring and to monitor capital adequacy.
Valuations of commercial property are conducted each year, every three years for residential properties, he said.
Cypriot lenders have loan provisions securing 37 per cent of NPLs, but this is lower than the 50 per cent buffer advised by the International Monetary Fund.
Large corporations account for the lion’s share of total loans (€27.2b), of which 48.9 per cent (€13.57b) were non-performing. The accumulated debt of small and medium businesses came to €5.5b, 56.2 per cent of which were NPLs.
Total credits to individuals stood at €25b, of which exactly half were non-performing.
Loans for owner-occupied housing amounted to €10b, and of these 41.3 per cent were non-performing. The collateral exposure in this category came to €1.54b.
Collateral-wise, the greatest bank exposure is to large corporations, to the tune of €6.9b. The second riskiest category is loans to individuals, of which €6.2b are not backed by adequate collateral, followed by consumer loans with a €2.6b exposure.