The fiscal council said that Cyprus needs to take swift and decisive action to address the high ratio of non-performing loans in the banking system, in order to contain future losses to its banks.
“Non-performing loans remain a threat for the economy and public finances, and an obstacle to both economic growth prospects and further sovereign credit rating upgrades,” the council said in its autumn report. “Despite progress made in the institutional framework of the financial sector, something reflected in the institutions’ profitability and the non-performing loan indicators, their amount continues to remain high”.
The council, tasked with monitoring fiscal developments to help avert a new fiscal derailment, said that addressing the banks’ challenges requires more effort in shortening the time required for banks to foreclose collateral.
Future “expected losses for Cypriot credit institutions caused by non-performing loans are estimated at €15bn if no further reforms are made, and half as much if reforms take place,” the fiscal council said, citing a report of the International Monetary Fund.
Non-performing loans in the Cypriot banking system make up roughly half of the banks’ loan portfolio. In August, they amounted to €25.6bn, down from €27.3bn in December 2014, according to the Central Bank of Cyprus’s current classification methodology. Overall provisions for loan impairments are estimated at €9.3bn.
“Should there be a scope for improvement, necessary reforms have to be pushed forward, given that neither credit institutions nor public finances are in position to ignore such a drastic decrease in (future) losses and the capital indicators of the sector,” the council said.