Banks running out of time to reduce NPLs, Marios Clerides says

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By Stelios Orphanides

Economist and former banker Marios Clerides said that while the reduction of non-performing loans will still take time, banks will face subsequently additional challenges in disposing real estate accumulated as part of their loan restructuring agreements and may end up with a large volume of terminated loans.

MARIOS CLERIDESFollowing the significant drop in larger non-performing corporate loans, the drop in smaller loans, extended to households or small and medium size enterprises is relatively small, and “will take a lot of time to be rectified,” Clerides who also chairs the Cyprus Economic Society said in a telephone interview on Monday.

Still, time is a luxury banks simply don’t have, according to financial ombudsman Pavlos Ioannou.

Should banks fail to reduce their non-performing portfolio over the next two years, the problem may get even more complicated, Ioannou told delegates at an even organised by the Movement Against Foreclosures, the Cyprus News Agency reported on Saturday.

Loans remaining un-serviced over a prolonged period and end up at the recovery department of a bank may force the latter to ask guarantors to pay which in turn will affect the ability of the latter to service their loans, Ioannou said.

Since December 2014, when the current methodology entered into force, total non-performing loans fell by almost €3.5bn to €23.9bn in November, still roughly half of the banks’ loan portfolio. The drop in bad loans was mainly on a €1.8bn decrease in loans of larger corporations. Households, small and medium size enterprises and other financial corporations reduced their non-performing loans by €411.6m, €582m and €630.7m respectively over the same period.

Central Bank of Cyprus Chrystalla Georghadji said in August that she expects a substantial drop in non-performing loans over the next three years, adding that international experience suggests that following a financial crisis, it takes up to five years for the bad loans to fall, provided economic growth remains strong.

Clerides said that while the cure ratio of around 75 per cent of the €13.6bn restructured loans in November is satisfactory and could lead to a significant drop in non-performing loans after the minimum one-year probation period is over, the slow pace of loan restructurings and the 25 per cent re-default rate, could ultimately lead up to “roughly half” of the banks’ problematic loans to the recovery departments in a couple of years.

The probation time further extends the probation period in the cases of failed restructurings, he added.

By then, through the debt-to-asset swaps included in the loan restructurings, banks will have a significant amount of real estate to dispose and “their non-performing loan problem will turn into an (illiquid) real estate in problem,” Clerides said.

“The question is how soon you can dispose land,” he said. “The biggest problem is that banks do not dare to foreclose because of the political and social system”.

The value of accumulated provisions for loan impairments booked by Cypriot banks stood in November at €9.2bn, according to the Central Bank of Cyprus.

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Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • westspoon

    The banks will have a hard time disposing of repossessed properties at the silly inflated valuations they are listing them at!

  • dave

    Do the banks have title deeds though?

    • Cydee

      Good question.

  • Barry White

    Guarantors need to be required to deliver on their payment guarantees now not after 3 years and another 2 years.

    In many cases they got the votes and rusfeti benefits demanded, now it is time to pay and cover their debts.