THERE was considerable political resistance to the proposal for a bad bank that would take over non-performing loans when it was first heard four years ago. Politicians did not like the idea of a bank forcefully trying to recover money owed to the banks. There was also a big practical obstacle, regarding the funding of the bad bank which would need large amounts of capital and staff to operate properly.
Even if there would be no bad bank, the Central Bank of Cyprus (CBC) knew that commercial banks would sooner or later have to find a way to remove the big number of NPLs from their balance sheets. It therefore prepared legislation that allowed banks to sell NPLs to third parties. There was strong political opposition to the bill and there was considerable foot-dragging before it was eventually approved by the legislature. Parties, fearing the alleged ruthlessness of foreign funds, unsuccessfully tried to exclude them through the legislation.
The banks have had to resort to the next best thing – outsourcing the management of their NPLs which they still owned. Hellenic Bank led the way by recently setting up another company to deal with its €2.4bn worth of NPLs in partnership with the Czech bad loans specialist APS Holdings. It was a smart move as the Czech company has expertise and know-how for dealing with NPLs, something that none of the local banks had. The Bank of Cyprus has set up a recoveries division and uses the services of an external advisor, but has not ruled out the possibility of following Hellenic’s example.
Having dealt with the restructuring of corporate loans, to a large extent, the banks will now have to focus on the NPLs of small and medium enterprises, as well as those of households which are a much more difficult proposition. These amount to €20.5bn and because the debtors are so many, banks would require a lot of time and resources to deal with them – there will be many loans that cannot be restructured which would lead to the closing down of businesses and the repossession of houses, which we suspect will be left to last because of bad publicity that is certain to be generated.
The NPLs of households are staggeringly high at €11.3bn, reportedly the highest in the EU. Only the Co-operative Central Bank, which did not give corporate loans but lent to households and small businesses, has had to deal with them so far. The other banks will enter the fray now which is why outsourcing is seen as an option that is also favoured by the CBC. Whether it proves effective remains to be seen.