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Pandemic made access to capital harder for Cypriot businesses

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The Central Bank of Cyprus on Monday said that the coronavirus outbreak in Cyprus, exacerbated by the emergence of the Omicron variant, led to a sudden tightening of business loan criteria during the fourth quarter of 2021.

One of the key reasons cited for the stricter lending criteria was the increased uncertainty surrounding the surge in Covid-19 cases and their impact on the real economy.

At the same time, according to the Bank Lending Survey of the Central Bank of Cyprus (CBC), the lending criteria for households remained unchanged.

In addition, Cypriot banks’ expectations for the first quarter of 2022 indicate that lending criteria for both businesses and households, for all kinds of loans, are expected to remain unchanged.

The Central Bank noted that, when compared to the third quarter of 2021, the main factors that contributed to the adoption of stricter business loan criteria were the banks’ perception of increased risk, both in terms of specific sectors and the economy in general, a reduction in banks’ risk tolerance, as well as and the increased costs associated with their capital position.

The CBC explained that lending criteria in the fourth quarter of 2021 became stricter for both small-to-medium-sized enterprises (SMEs) and large enterprises.

Moreover, noted that change during the fourth may be due to the surge in Covid-19 cases observed after the emergence of the Omicron variant and its rapid spread to the population, which escalated uncertainty about how the real economy would be affected.

“This development contradicts the expectations expressed by the banks in the October 2021 survey, which expected that the criteria for the granting of these loans to remain unchanged during the fourth quarter of 2021,” the Central Bank said in a statement.

Meanwhile, the net demand for business loans in Cyprus recorded a quarterly increase during the fourth quarter of 2021.

This has been attributed to increased demand for working capital and product stocks, but also for fixed investments.

In terms of loans linked to fixed investments, the Central Bank said that they positively affected demand for the second consecutive quarter, the first time this has happened since the start of the pandemic.

Furthermore, the increase in financing needs for both product stocks and working capital may be related to increases in commodity and product prices due to disruptions or shortages in the global supply chain.

Meanwhile, mortgage loan criteria for households remained unchanged in the fourth quarter of 2021, something which was in line with the expectations recorded in the previous quarter’s survey.

The Central Bank said that surveyed banks did not observe a change in their perception of lending risk to households, the third consecutive quarter this has happened since the start of the pandemic.

“This may be due to the fact that the pandemic and the restrictive measures imposed to curb it have affected business turnover more than households,” the CBC explained.

The criteria for granting consumer and other loans to households remained unchanged compared to the previous quarter, which met expectations from the previous quarter.

The CBC survey also showed a significant increase in demand for mortgages from households during the fourth quarter of 2021, an increase that exceeded banks’ during the previous quarter.

“The increased demand, according to the surveyed banks, is primarily attributed to the increased demand for participation in two government projects, which expired at the end of December 2021,” the Central Bank said.

Regarding the demand for consumer and other loans, the CBC noted that this remained unchanged for the second consecutive quarter, a development that is “contrary to the growth expectations expressed by the participating banks in the previous quarter’s survey”.

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