Cyprus banks tighten lending criteria due to geopolitical uncertainty

The Central Bank of Cyprus (CBC) on Tuesday announced that it has recorded a tightening of lending criteria, combined with a decline in net demand for loans, during the second quarter of the year, reflecting the growing uncertainty about the global economic environment stemming from the war in Ukraine.

The above conclusions are the result of the bank lending survey the central bank conducted for the second quarter.

The central bank noted that these results are consistent with the expectations of Cypriot banks, as they were expressed during the previous quarter. In addition, banks said that they expect stricter lending criteria during the next quarter.

According to the report, lending criteria for both businesses, as well as for all categories of loans to households, became stricter compared to the previous quarter.

“Banks pointed to the increased risk perception in relation to the general economic situation, housing market prospects and the solvency of borrowers as the main factor behind the adoption of stricter lending criteria,” the central bank said.

What is more, Cypriot banks’ reduced risk tolerance also contributed to the tightening of business loan criteria.

Regarding the banks’ expectations for the next quarter, the central bank said that “stricter criteria for granting loans in Cyprus are expected for all loan categories, quite possibly due to geopolitical developments and increased uncertainty about the global economic environment”.

“The banks’ tighter lending policy aims to limit the number of any new non-performing loans,” the central bank added.

The central bank goes on to say that although the overall terms and conditions for granting loans or credit lines to businesses remained unchanged during the second quarter of 2022, conditions such as banks’ margin, meaning the difference against a relative reference rate, for higher-risk loans, requirements for providing collateral, as well as the size of the loan or credit limit were all tightened.

Again, this was attributed to an “increased risk perception and reduced risk tolerance”.

Regarding the overall terms and conditions of granting loans to households, including housing and consumer and other loans, they remained unchanged during the second quarter.

Meanwhile, net loan demand from Cypriot businesses and households in the second quarter of 2022 recorded a decline compared to the previous quarter, something that will be officially recorded in future data.

The decline in demand for business loans is attributed to the reduced demand for financing fixed investments, mergers or acquisitions and business restructurings. Debt restructurings and the general level of interest rates have also contributed to the decreased demand.

“Businesses have decided to postpone their investment plans due to the uncertainty of geopolitical developments and their economic consequences,” the central bank said.

However, the central bank also noted that there was increased demand for business loans for the purposes of replenishing or refreshing the inventory, as well as for operational capital, something which is likely related to rising energy and raw material prices combined with the ongoing supply chain disruptions.

As for the net decrease in household demand for housing loans, banks have attributed this to the end of the government’s interest rate subsidy scheme for new housing loans on 31 December 2021 and the resulting increased loan demand recorded before its end.

Additional factors include the escalation of events in Ukraine, as well as the dent in consumer confidence.

In relation to the demand for consumer and other loans from households in the second quarter, the survey showed that this was due to a drop in consumer confidence and a decrease in spending on the purchase of consumer durables.

“This is due to price increases, as well as the generally negative impact that inflation has had on real household disposable income,” the report noted.

Finally, based on banks’ expectations for the next quarter, net loan demand in Cyprus is expected to remain unchanged compared to the previous quarter, both from businesses and for all categories of household loans.