By Elias Hazou
FINANCIAL authorities are warning MPs that they could put Cyprus’ banks at risk by enacting legislation which stops in its tracks efforts to recover bad loans, such as by suspending repossession proceedings on mortgaged properties.
In a letter circulated to the House finance and interior committees, the Finance ministry said some of the legislative proposals would deal a severe blow to the viability of commercial lenders.
Private debt is the foremost challenge facing the economy. Non-performing loans (debt not serviced for over 90 days) account for around half of all bank credit in Cyprus.
Should lawmakers hinder banks from effectively wielding foreclosures as leverage on uncooperative borrowers, this will force lenders to make increased loan provisions on their books, sapping their liquidity, the ministry said.
The ministry is particularly concerned about a bill drafted by the opposition AKEL party, which provides that people demonstrably hit by the financial crisis may take to the courts to have repossessions against them frozen, either when foreclosures proceeding have begun or are about to.
Under the AKEL item, this would apply to the primary residence and to business premises. The bill is designed to protect borrowers who have fallen on hard times.
But the ministry warns this will ultimately backfire, only achieving in delaying the repayment of loans in arrears and sweeping the debt problem under the rug.
And preventing banks from initiating or carrying through repossessions would reward borrowers who do not service their loans though they are able to.
Moreover, the ministry said, banks’ worsening loan portfolios would discourage possible future investors.
The stability of the banking system, achieved after two years of painful adjustment following the bail-in of deposits, must not be jeopardised.
According to the ministry, current laws already afford distressed borrowers several stages before a bank can finally move on their property.
Bank of Cyprus, the island’s largest lender, has said it has no intention of engaging in mass foreclosures, and will instead focus its loan recovery on the handful of big debtors, such as developers.
The AKEL items are among a slew of amendment bills drafted by the parties to the insolvency framework – a set of laws governing personal and corporate bankruptcy.
Altogether, the parties have churned out scores of legislative proposals. At one point, there were about 80 bills out there, although it’s understood that several of these will be retired as they have since been incorporated into the five government bills comprising the insolvency framework.
For example, the revised government bills have taken on board DIKO’s proposal for raising the debt amount that can be cancelled from €15,000 to €25,000.
This applies to people unable to repay their debts. Eligible for debt forgiveness are people with a monthly income of €200 and assets of up to €1000.
Another DIKO proposal that has made it into the updated insolvency package sees protection from repossession afforded to primary homes worth up to €300,000 – from €250,000 initially – and for total debts of €350,000, up from €300,000.
The House is to vote on the insolvency package during an extraordinary session of the plenum on April 17.