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No sign banks are gaming subsidised interest rates MPs told

Lawmakers on Monday appeared mostly satisfied with answers they got from both the government and banks regarding complaints that certain lenders sought to fleece borrowers eligible for the special interest-rate subsidy scheme.

In late June the government rolled out a scheme where the state will subsidise the interest rate on new housing loans (self-occupied residences), and another subsidising interest rates on business loans.

The plan covers loans approved from March 1, 2020 to December 31, 2020.

On the home loans, the loan amount whose interest rate will be subsidised must not exceed €300,000. The duration of the interest rate subsidy will be for a period of four years, and the interest rate will be subsidised by up to 1.5 percentage points (150 basis points).

However, MPs were contacted by a consumer claiming that the bank he was doing business with had tried to exploit the situation.

He visited the bank in early June, and they had quoted a certain price for the interest rate on a home loan he was seeking. The price quoted then was 1.95 per cent.

When he went back for a second meeting, the same bank quoted an interest rate of 2.25 per cent.

In addition, the person alleged, the bank had set certain side-charges, which it subsequently withdrew.

Apparently the lender in question had planned to charge the client a fee on the loan contract, which came to 1 per cent of the loan amount.

From this complaint, some legislators were led to believe that lenders were trying to game the subsidy scheme.

Giorgos Panteli, permanent secretary at the finance ministry, told MPs the government had anticipated such eventualities when formulating the scheme, so it had set a ceiling on the interest rate margin of 2.25 per cent. As a safeguard, anything above that number would not be eligible for subsidy.

“This margin ceiling of 2.25 per cent plus Euribor will remain in place throughout the repayment of the loan,” Panteli explained.

“The margin set on the day the loan contract is signed shall be fixed until the loan is repaid. On the other hand, Euribor is not set by the banks and is the only component that can change.”

Euribor, or the Euro Interbank Offer Rate, is the benchmark rate with which banks lend or borrow excess reserves from one another over short periods of time, from one week to 12 months.

According to Panteli, in 2019 certain banks in Cyprus, having reduced their stock of non-performing loans, had set their lending rate at around 2 per cent. The same banks have since raised the margin to 2.20 to 2.22 per cent, whereas just before the Covid-19 situation hit in Cyprus, the margin was at 2.1 per cent.

Demetra Valianti Plati, a senior officer with the Association of Cyprus Banks, likewise dismissed the notion that lenders were raising their interest rates specifically to take advantage of the subsidy scheme.

She said just one bank had recently raised its interest rates, but that this was due to the fact it was reacting to the increased lending risk amid the coronavirus epidemic.

Moreover, this particular bank’s interest rate was lower than that of other lenders, Plati said.

“It would have raised its interest regardless of the government scheme,” she noted.


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