Banks warned on Friday that a proposed bill to allow loan defaulters to file a case in court to suspend the foreclosure process, posed a huge risk to the banking sector, the economy and the creditworthiness of the country.

In a statement, the banking association said it disagreed with the proposed bill as it would weigh down both the judicial system and the banks, tying up cases in court for a long time.

It will lead to an increase in the risk profile of the Cypriot banking system and by extension the banks. It will also create uncertainty in relation to the stability of the Cypriot legal framework, deterioration of the creditworthiness of the Cypriot economy, the association said.

The move would also create negativity for the banks during EU stress tests, and lead to a reduction in the value of collateral, both of serviced and non-serviced loans, “precisely because of the delay and lengthening of the completion time of liquidation procedures”.

Stress tests determine the amount of the provisions and by extension the capital needs of the banks.

The bill could also result in the need for additional collateral for granting new loans and a possible increase in household and business borrowing costs, “encouraging and possibly increasing the number of strategic defaulters” and also reduce the value of loan portfolios in the even of selling them to third parties such as credit buyout companies, the banking association said.

“The proposed bill for referral [to the courts by defaulters] to the already overburdened Cypriot courts facing long adjudication times for cases will cause a major and permanent jam both in the banks, and more broadly in the judicial system, but also in the economy, financial stability at a time of great challenges,” the association added.

It said that amendments to the already-existing legislation were contrary to the wishes of the European supervisory authorities.

According to the association: “The European supervisory authorities as well as the European institutions have set as an absolute priority at the European level, the reduction of NPLs (nonperforming loans). To this end, they have established and enforced strict European regulations and guidelines.”

The banks added that in the event of the adoption of the proposed bill, Cypriot banks will find themselves in a more unfavourable position compared to other corresponding European banks since they will be prohibited from using the tool of foreclosures.

The proposed bill was submitted to parliament, during Thursday’s plenum and is the consolidation of six party law proposals to ensure the suspension of foreclosures through a court, which is already gathering a majority to be approved and become a law of the state.

The law proposal has the support of the parliamentary groups of Akel, Depa, Edek, Elam, the Greens, and Diko MPs, Zacharias Koulias, Pavlos Mylonas, and Christos Orphanides and the MPs Costis Efstathiou and Andreas Themistocleous.

In total, based on the signatures in support of the law proposal, it would gather 33 votes in a plenum session, if unchanged.

However, weighing in on the matter, when it was previously raised about two months ago, the finance ministry said that they place enormous importance on a stable legal framework, which will govern out-of-court auctions, alongside the existence of an effective insolvency framework, to achieve the goal of reducing NPLs.

In the same announcement, the ministry said that the new foreclosure framework, as passed by parliament in August 2019, provides the possibility of an out-of-court appeal/appeal by borrowers with Non-Performing Loans to the Financial Commissioner, for examination of their complaints against credit institutions concerning, among other things, overcharging and violation of the Code of Conduct of the Central Bank of Cyprus.

The ministry added that if the commissioner finds a violation on the part of the borrower’s creditor to the restructuring code, the borrower will be entitled to appeal to the court which will immediately issue a decree to suspend the foreclosure of their mortgaged residence or business premises.