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Banks cannot afford to relax lending criteria says CBC governor

Central Bank Governor Constantinos Herodotou

Despite ample liquidity, banks should not relax their lending criteria and repeat the mistakes made in the past, central bank governor Constantinos Herodotou said on Tuesday.

Speaking at a lunch organised by the Nicosia Rotary Club, Ledra, Herodotou said Cyprus’ bank liquidity coverage ratio was 352 per cent compared with the eurozone’s 150 per cent.

However, “banks should not rush to grant loans by relaxing the criteria,” he added.

“We must not repeat the mistakes of the past. Yes, there is excessive liquidity, yes our banks are faced with two challenges, NPLs (non-performing loans) and profitability, but we must not allow lenders to rush and grant loans,” he said.

The governor said banks must assess the risk, the ability to repay, and only when applications display a sound business action and repayment ability should the lender be left alone, without pressure, to grant loans that will be good for their balance sheets and their activities.

“And if the banks overdo it, then the supervisor’s responsibility is to change the regulatory requirements,” Herodotou said. “If, as the CBC, we see that certain sectors are overheating, to avoid our country’s curse of going from bubble to bubble, we must start preventing bubbles as much as we can.”

Herodotou also advised smaller banks to follow the path of the bigger lenders in reducing their bad loans.

The governor said Cyprus has managed to cut NPLs by 68 per cent to 32 per cent, or €9.5bn since their peak a few years ago, but it was still far from the 10 per cent threshold set by the single supervisory mechanism (SSM) and the EU’s average of 3 per cent.

Herodotou said the SSM was not expecting the island to cut its NPL stock to 10 per cent inside a year but it did want to see a credible path towards their reduction.

“I think the large banks have shown this in recent days, and that is good, but I think we must encourage smaller banks too, now that they see that this has worked for the larger banks.”

The island’s three biggest banks, Bank of Cyprus, Hellenic, and RCB, are under the supervision of the SSM whereas the rest are supervised by the central bank.

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