Financial Ombudsman says sale of loans only helps banks, not borrowers

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By Stelios Orphanides

Financial Ombudsman Pavlos Ioannou said that the clean-up of banks’ balance sheets with the sale of loans does not effectively help tackle non-performing loans as it subsequently continues to exclusively burden the society, the Cyprus News Agency (CNA) reported.

Sustainable restructurings -to the extent they are possible- may constitute the most effective way of resolving non-performing loans, the agency reported citing a note submitted by Ioannou to the members of the parliament’s finance committee.

Ioannou was commenting on a draft law proposed by a group of Disy lawmakers to extending exemptions of borrowers involved in loan-to-asset swaps from capital gains tax, stamps and duties and other charges for one more year.

The exemption aiming at encouraging loan restructurings are expiring at the end of the year, lawmaker Marios Mavrides who together with Disy chairman Averof Neophytou and Onoufrios Koulla proposed the bill, said.

“These transactions should not be considered as regular sales of property,” he said in a telephone interview.

“Members of other parties in the committee supported the bill and proposed extending the exemption until the end of 2020 as the problem with the non-performing loans is expected to remain in place,” the Disy lawmaker added.

The Financial Ombudsman who also supported the bill, said that he also favoured extending the exemptions for three to four years.

Only “drastic and courageous economic policy measures” allow the effective tackling of the non-performing loans problem, deemed the most serious risk for financial stability in Cyprus, he said adding that “it goes without saying that these measures should in no way burden taxpayers and public finances”.

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About Author

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

  • Jeremy Rigg

    Now then, let me see what we need for this operation…………..I think its a bean and 3 cups. Simples….

    • Eye on Cyprus

      Sorry! No bean.

  • It’s not delinquent borrowers that need protecting. It’s the depositors and regular users of the banks.

  • Pc

    If it helps banks and doesn’t damage borrowers (it can’t – there is a contract in place), then what is the problem? This operation is not meant to help the defaulting depositor, nor is he/she the true problem. The real issue is that because of the high rate of default, banks have no funds to finance healthy investments.

    What the sale of (bad) loans will do is:
    – convert loans back into cash.
    – cash can then be used again to finance new, good loans. It can finance start ups.
    – it enables the banks to become banks again, instead of bad debt collection agencies.
    – banks are one of the engines to economic growth. Unhealthy banks = low/no growth.

    You get it now Ombudsman?

    • But who decides what a good loan is ? The same people who signed off the last batch of NPL’s ? 😉

      • Pc

        One would hope banks have learned what proper risk management means. Personally, I doubt the COOP has, but BoC, RCB and Hellenic should be better in that regards. Not least because they sit directly under ECB supervision now.

        • I believe even in the case of bad loans mechanisms are in place. If you secured a loan against your home it is at risk. If you signed as a guarantor then it must be honoured.

          • Pc

            Of course. But you cannot accept a house as collateral when it is not worth at least 125% of the loan value. And you cannot accept a guarantor when that guarantor does not have sufficient income him-/herself. You also should not extend mortgages higher than about 3-4 times the gross income of the borrower. You shouldn’t extend mortgages that do not require repayment, etc, etc.

          • So in that case the banks were negligent and should burden the losses.

          • Pc

            Which they did. To the point of bankruptcy. And that impacted depositors. Eh…what to say, re?

          • No i mean a cut in wages and bonuses. A hit in share prices etc, back then depositors were naive and didn’t deserve to be robbed as they were wholly innocent.

          • Pc

            Wholly innocent? Debatable. Firstly, no-one with deposits below 100,000 lost anything. So, it is only the bigger fish. And quite frankly, if you have a 100,000 you (should) be aware of such strategies as splitting your deposits across multiple banks. Also, if you have 100,000 you can afford to open up foreign bank accounts and set the money there. If it was all in one bank under one name, people’s judgement and prudence should be questioned.

            The reality is that many simply didn’t expect this to happen (too big to fail syndrome) but were willing to collect the higher interest rates that Cyprus offered compared to other banks. Just like what happened in the case of the Icelandic banks. But the vigilant ones saw this coming at least a year in advance and acted on it. There is a reason why the ELA to Cypriot banks ran up to roughly €10 billion.

            And lastly, Cyprus was actually not the first country where this bail in happened. The first country was the Netherlands where the SNS bank was bailed in and all shareholders and bond holders lost their money. And guess which finance minister chairs the Eurogroup 🙂

          • It looked to me like they got away laughing. The bank of cyprus inherited all the bad debt and Laiki staff. I wonder if Mr Vgenopoulos really died….. 😉

      • Didier Ouzaid

        I recently met with a mortgage officer at the 2nd largest bank, and the criteria I was given (and fortunately met) are not NPL criteria. They are rather stringent, if not anything else, regarding the down-payment required (a third of the total loan).

        Granted I have no connections and am not Cypriot, but it’s almost…encouraging.

  • Stepharakalo

    A quick recap of what we already know. 50% of outstanding loans given by Bank of Cyprus are non performing. This amounts to €10 billion (yes, really, ten thousand million euros). Having made a provision of €500 million last year, the BOC will need to do this for the next 20 years to remove the unbelievably high risk to their business. No bank can withstand half of all loans failing to be repaid for so long. Bank of Cyprus and the Cyprus government need to urgently grow a pair and tackle the cynical withholding of money due by loan recipients.

  • Didier Ouzaid

    “it goes without saying that these measures should in no way burden taxpayers and public finances”.

    So what exactly does Society want? I fail to understand. They want banks to start financing the ‘real’ economy and healthy investments again, they dont want taxpayers as a whole to foot the NPL bill, and they do not want the borrowers to suffer anything (further monetary hardships, auctioned properties, etc.).

    Smth’s gotta give here. You cannot just stop paying your dues and expect them to be magically written off. That’s not what loan restructuring means. And yeah selling loan portfolios benefit the banks, so what? The banks own that debt. Passing it on to another entity doesnt change jack for the borrower.

    • Well it changes for the borrower. Now it’s not your friend at the bank making a friendly call, it’s a stranger hell bent on collecting his due.

      • John Henry

        Exactly, but, I wonder how well that will work out if it goes further meaning when someone does not pay up.

        • Baliffs ?

        • Arnt Otto Østlie

          This time around the debtor faces someone who means business, so he should do his best (oftentimes much better than with his “own” bank) to seize this opportunity to get things settled.

          • Barry White

            “seize” as you state Arnt is the operative word and the solution.

    • Caulkhead

      And if it all goes pear shaped again it will be those who were ‘silly’ enough not to get into debt and deposited the funds to support the loans in the first place who will be hurt the most!

  • Bernard Smart

    Its very very simple!
    The banks fail to recover what is owed to them – they go under
    The debtors fail to pay up – they loose the capital item (car, house, hotel etc)
    The government uses tax payers money to pay off the NPL’s – the banks are happy and continue to exist – the debtors get to keep what they obtained fraudulently and pay nothing.
    This is Cyprus after-all – guess which is most likely?

    • Kevin Ingham

      Cyprus was a guinea pig with the last bail in. Brutal though it was, it was also effective (except that they failed to take account of the NPL’s which was a ludicrous oversight by the Troika)

      As a result the EU have now passed legislation making state bail outs of banks illegal unless under “exceptional circumstances”

      Those circumstances apply to only those countries big enough to jeopardise the Euro (like Italy)which was recently allowed to bail out some of it’s banks despite the government being broke. A bail in would seen so much money fleeing the rest of the Italian banks that the whole system would have collapsed .

      Cyprus is of course different-it is not a big enough Euro fish to make a difference. It’s government will not be allowed to bail out it’s banks (it’s only the ECB that could “lend” them the money for such a move, the “markets” would not touch them with a barge pole) and there will be another haircut to cover the losses on the NPL’s if they are not resolved

      If that fails then Cyprus will get the “Greek treatment”, where the debt is transferred to the national debt and failure to comply with the Troika requirements will see the money supply cut off – which usually ensures “compliance” regardless of the social costs

      • Arnt Otto Østlie

        During the crisis early 90es, the largest Norwegian bank DNB was taken over and refinanced by the state. 66% of the shares were eventually sold to investors, making the state more than recover its injected capital.

        • Kevin Ingham

          How does the current Cyprus government (in hock to the tune of 110% of GDP) refinance the Cypriot banks without being able to raise money on the markets or create it’s own money?

          • Bernard Smart

            as you said above ‘a complete basket case’.
            and the rating agency’s must be blind deaf and totally lacking in understanding to keep upping their ratings. institutional investors may have massive amounts of other peoples money to waste. personally i dont keep a bean in cy any longer.
            its not a case of if but when they go tits up again.

  • Kevin Ingham

    The problem with “going after” the non performing borrowers is that in many cases they have been loaned money way beyond their ability to pay

    If they have to start paying their loans then that in the short term turn sucks more money out of the economy as a whole and if their businesses are wound up for non repayment of loans we get higher unemployment and more companies and individuals starting to struggle to pay their loans they were previously servicing . It’s a vicious deflationary circle

    Cyprus has one of the highest level of personal debt in Europe and households and business have to repair their balance sheets before the banks can ever effectively repair theirs.The banks have a percentage level of NPL’s that would see them declared bankrupt in the real world – it’s way worse than even Italy ,and that banking system is a complete basket case

    The challenges facing Cyprus as a result of the last financial meltdown remain enormous and there is no quick or easy fix