Central Bank Governor Chrystalla Georghadji said on Sunday that as Cyprus prepares to exit its three-year bailout programme next month, she was optimistic for the economy and the banking system but said non-performing loans (NPL) were still the main stumbling block to recovery.
In an interview with the Cyprus News Agency, Georghadji said though the first signs of a reduction in NPLs were becoming evident, it would take some time to see real results, she said.
“Although the NPL ratio remains at high levels, it has started to show signs of improvement in the situation through restructuring that have been made and which are designed to help borrowers facing problems,” Georghadji said, adding that €4.7 billion in loans had been restructured by November 2015. The CBC has set new targets for the commercial banks for the first quarter of 2016, amounting to €1 billion in proposed and viable restructuring solutions and an additional €1 billion in agreed restructuring.
“With the passage of the law of foreclosures and the adoption of the insolvency framework by the House of Representatives in April 2015, there is now the risk that those who can afford to, but strategically choose not to service their debts, will find themselves faced with legal implications,” she added.
“There are indications of a percentage of households that do not service their loan obligations who potentially could. This phenomenon was particularly evident in 2013 and 2014 but it is on a downward trend.”
“We should remain focused on the target (of NPL reduction) but the results of our efforts will take time,” she said.
Asked when banks would start granting new loans, Georghadji said that during 2015 new loans worth €1.7bn were given out, of which € 1.2bn went to companies and the remaining €0.5bn to households’, an amount she described as “respectable” given the size of Cyprus.
“However, we should keep in mind that many households and businesses are over-indebted and are trying to find ways of deleveraging (to repay their loans) rather than obtain additional new loans,” Georghadji stressed.
According to as study by the central bank, Georghadji said bankruptcies had fallen between 10 and 20 per cent.
The banks, she said now have a strong capital base and are supervised by the EU’s Single Supervisory Mechanism and had increased their provisions for coverage of NPLs. At the same time, she added, deposits had stabilised and in some cases increased.
According to Georghadji after growth of 1.6% in 2015, there was an expectation that the economy would grow excess of 2% this year.
“Recent economic developments were better than originally expected by our international lenders, particularly in relation to the GDP growth,” she said.
“To continue this positive performance we should, of course, pursue collective economic consolidation efforts. With responsible handling by all, I am optimistic that we can achieve even better results,” she added.
Commenting on restructuring due to take place at the CBC itself, Georghadji said a study by outside experts was focusing on three areas; the organic structure of the Central Bank, its internal procedures and standard practices, human resources and governance issues.
One of the key findings of the advisory firm was the “high-quality of human resources” at the CBC, she said.
“The people at the Central Bank are its most important resource and we need to make any changes based on utilising this to the fullest,” Georghadji said. Assistance was also provided by the IMF “which has wide experience of this issue and of best practices”.
Georghadji was, she added in contact with Finance Minister Harris Georgiades who will need some time to present the restructuring changes to parliament as it involves changes to the structural framework of the institution. The plan is for the changes to be in place by the end of 2016.