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Restructure your loans or face foreclosure, ombudsman says

Pavlos Ioannou

Borrowers with non-performing loans (NPLs) should rush to have them restructured as soon as possible to avoid drastic measures, financial ombudsman Pavlos Ioannou said on Tuesday night, noting that Central Bank of Cyprus’ recent call for banks to introduce radical solutions translates to repossessions and foreclosures.

Speaking at a seminar on non-performing loans and loan restructurings organised by the borrowers’ association in Limassol, Ioannou said CBC governor Chrystalla Georghadji’s recent remarks in parliament suggests that “the portfolio of NPLs not yet restructured cannot be tackled through restructuring alone”.

“Since restructuring efforts have been exhausted, the more radical solutions she referred to but did not name are, unfortunately, none other than repossessions and foreclosures,” he said.

He urged every borrower with a non-performing loan to demand that it is restructured as soon as possible, on the basis of the relevant Central Bank directive that banks should comply with.

“The Central Bank directive is an excellent tool for the restructuring of non-performing loans,” he said.

“If the directive was fully adopted, both by banks and borrowers themselves, who also have a responsibility in this process, the trajectory of NPL stock would be very different and the problem would be much smaller.”

An NPL, Ioannou explained, develops its own dynamic, inflating it with time.

“Therefore, it is a myth that the problem will be resolved in five or 10 years,” the ombudsman said.

“By then, it will be completely impossible to tackle.”

He explained that NPLs tend to become contagious, since the obligations of a borrower in default are transferred to guarantors, who may then be unable to service their own loans, making those non-performing, too.

“But even if the guarantors continue to repay their loans, the protective measures banks take on their property create new restrictions on economic activity,” he said, thus forming a vicious cycle.

Another distortion created by NPLs, Ioannou noted, is the risk of destruction of the social fabric and Cypriots’ traditional familial bonds, as guarantors have traditionally been close relatives.

“To a large extent, the Cypriot economy survived the first months of the financial crisis because of the particularly close family ties, through which one relative helped the other,” Ioannou explained.

“This phenomenon will disappear if the NPL situation is allowed to fester.”

Finally, the ombudsman highlighted the indirect cost of non-performing loans, as their high stock is the only thing keeping Cyprus in non-investment grade rating by international agencies, resulting in higher borrowing cost and cautiousness by foreign investors.

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