Stricter lending criteria lead to reduction in loans in Cyprus

The Central Bank of Cyprus (CBC) reported this week that its January 2023 Bank Loan Survey had recorded stricter lending criteria for all categories of loans, resulting in reduced supply and demand for loans.

The survey revealed that for all categories of loans, Cyprus continued to go through a period of tightening lending criteria.

In the fourth quarter of 2022, lending criteria for both businesses and all categories of loans to households tightened for the third consecutive quarter.

The central bank explained that Cypriot banks’ perception of increased risk due to continued high uncertainty contributed to the tightening of their criteria for granting loans.

Moreover, banks’ reduced tolerance for risk also contributed to the establishment of stricter criteria for granting business and housing loans in the same quarter.

Additionally, banks’ assessment of increased risk in relation to business loans concerned the general economic situation and prospects, the solvency of the borrowers, and the requested collateral.

In the same quarter, the overall terms and conditions for granting loans to households for mortgages and, more so, for consumer and other loans, became stricter.

This development reflects the increased risk perception by the banks and the reduced risk tolerance, and in the specific case of housing loans, the reduced competition.

On the demand side, the net demand for loans in Cyprus from businesses and households in the fourth quarter of 2022 continued to register a decrease, mainly due to the reduced demand for financing fixed investments and the increase in lending rates.

The decrease in demand for consumer and other loans is attributed by the banks to the decrease in consumer confidence, the increase in interest rates, and the decrease in spending on the purchase of durable consumer goods.

According to the expectations of the banks, the period of reduced loan supply and demand is expected to continue in the first quarter of 2023.

What is more, banks expect stricter criteria for granting loans in Cyprus for all categories of loans to households and, to a greater extent, for business loans.

The net demand for loans in Cyprus is also expected to decrease further, both from businesses and from households, for all categories of loans.

According to the announcement, the results of the January 2023 Bank Lending Survey record the changes in lending criteria and loan demand that occurred in Cyprus in the fourth quarter of 2022 compared to the third quarter of the year.

The survey also shows the changes expected to occur in the first quarter of 2023 compared to the fourth quarter of 2022.

The results of the survey reflect the perceptions and expectations of the participants and do not reflect any perceptions, expectations, or estimates of the Central Bank of Cyprus.

The Bank Lending Survey is a qualitative survey of bank lending in the euro area aimed at increasing clarity on the banking landscape, including financing conditions in Cyprus.

The survey’s questionnaire is addressed to a representative sample of banks in each euro area country and covers a wide range of topics on lending to businesses and households.

The survey is conducted four times a year, and the national results are published a few days after the publication of the research by the European Central Bank.