Demand for loans from businesses and individuals alike declined during the first quarter of the year as banks tightened up their lending criteria and raised interest rates, according to a just-released report by the Central Bank of Cyprus (CBC).

The CBC’s Bank Lending Survey for April 2023, covering the first quarter of this year found that banks’ lending criteria to businesses became more stringent for the fourth consecutive quarter, while lending criteria to households (all types of loans) remained unchanged.

Demand for businesses and consumer loans continued declining.

The survey also predicted that banks would further tighten up their lending criteria going forward as their “risk perception” increases.

“Banks’ perceptions about heightened credit risk, linked to the current situation and to the prospects of the economy at large but also of specific sectors or businesses, as well as their reduced tolerance for risk, continue to play a part in the tightening of criteria in granting business loans.”

During the first quarter of 2023, although lending criteria for consumer loans remained unchanged, the overall terms and conditions for new loans became more stringent.

“A tightening up was also reported in [contract] clauses regarding the duration of new business loans…while banks’ margin for ordinary loans (difference in relation to the relevant reference interest rate) declined on a net basis, although banks did have different opinions on the matter.”

The report also said that in the same quarter, the terms and conditions in loans to households – both for home loans and consumer loans – likewise became more stringent.

The CBC cited various reasons for the drop in demand for loans – rising interest rates and falling demand for the financing of fixed investments, mergers and acquisitions, and company restructurings.

Conversely, demand for inventory financing and for seed capital “continued rising this quarter, perhaps due to high production and operating costs for businesses.”

Regarding households, the drop in demand for home loans is attributed to higher interest rates, deteriorating confidence among consumers and a perception of less favourable prospects for the property market.