In his appearance before the House finance committee on Monday, Central Bank governor Constantinos Herodotou was asked by deputies about the protection of ‘vulnerable borrowers,’ after he said the extension of the foreclosures freeze could not be justified. For the support of the ‘vulnerable borrowers’, he said, there was the Estia scheme and the insolvency framework.
More importantly, though, he expressed the view that protection for the so-called ‘vulnerable borrowers’ should be provided through social policy and not through the banking system. Although this was a statement of the obvious, it has never been obvious to deputies and political parties, that are under the illusion that the banks must operate like a benevolent concern with a mission to support people not repaying their bank loans.
Herodotou told the committee that of the existing non-performing loans (NPLs) 55 per cent are showing arrears of more than five years and 32 per cent of more than seven years. The average age of NPLs in Cyprus was the highest in Europe, a fact that did not justify another freeze on foreclosures, said the governor.
Unfortunately, this practice of preventing foreclosures has become something of a farce. Cyprus entered a recession in 2012 and left the assistance programme in 2016, after which there had been three years of impressive economic growth, only halted by the pandemic. If people could not repay their bank loans after the economic recovery it meant they never would be able to do so or they were strategic defaulters, exploiting the system. In both cases, foreclosures were the only way to deal with them. There are no ‘vulnerable borrowers’, only people that borrowed more money than their finances justified.
The problem is there will be parliamentary elections next year and the political parties have already begun the hunt for votes. Apart from protecting ‘vulnerable borrowers’ they also considered extending the suspension of loan repayments that came into force in March and is set to expire at the end of this year. This would also be unjustified, said Herodotou, given that the economy was working and there would be growth in 2021. If the suspension of repayments were extended, it could give rise to a new generation of NPLs, which would affect the credit rating of both the banks and the state, he warned.
The last thing we wanted, said the governor, was to encourage behaviour that worsened the payment culture. He is right, but how can we overcome this culture when the political parties seem to think it is their obligation, through legislation, to protect people that are not repaying their debts and labelling them ‘vulnerable borrowers.’