(Updates with background in six paragraph)
By Stelios Orphanides
The Central Bank of Cyprus (CBC) is considering issuing lenders new targets to reduce delinquent loans shifting the focus from restructurings to non-performing loan ratios and encouraging banks to go hard on strategic defaulters, a bank official said on Thursday.
The new target indicators are expected to be announced before the end of the year when the Single Supervisory Mechanism (SSM) of the European Central Bank (ECB) completes its evaluation of reports filed by supervised banks on the anticipated evolution of non-performing loans over the next five-year period.
The current four indicators introduced two years ago “were aiming at encouraging banks to restructure loans”, Yiangos Demetriou, head of CBC banking supervision division, said in an interview to state-radio CyBC on Thursday.
“They worked somewhat but not to the desired extent. We recently witnessed that restructuring rates have slowed down, or rather came to a halt.”
On August 3, the central bank said that the banks met only the indicator on sustainable restructuring solutions and failed the remaining three concerning the conclusion of restructuring agreements, the cure ratio of restructured loans and the aggregate arrears ratio.
Non-performing loans in the Cypriot banking system stood at €23.2bn in April according to the latest available figures and accounted for 46 per cent of total loans. The result of excessive credit expansion in the years before the 2013 banking crisis, the mount of NPLs is still considered a major risk for financial stability.
In the past weeks, Bank of Cyprus, the largest Cypriot lender announced a €500m increase in provisioning levels while Hellenic Bank, the third largest Cypriot bank, said it would increase its provisions by €51m.
The implementation of an agreement between Hellenic Bank and the Prague-based non-performing loans specialist APS Holdings to set up APS Debt Recovery Ltd that will bring additional knowhow in managing the Cypriot lender’s bad loans in July may be related to the central bank’s consideration of shifting focus toward actual reduction of bad loans.
A similar agreement was also reached between the Cyprus Cooperative Bank and Spain’s Altamira.
Hellenic, with a non-performing loan stock of €2.5bn or 57 per cent of its portfolio, and the Co-op, with €7.2bn in bad loans or roughly 60 per cent, are trailing Bank of Cyprus which pioneered reducing delinquent loans to €9.7bn or half of its total loans by setting up a specialised recovery and restructuring division as early as 2013.
Governor Chrystalla Georghadji said on Wednesday after meeting President Nicos Anastasiades that the bank supervisor was mulling changing the banks’ performance targets in order to boost their efforts.
Demetriou added that while reducing non-performing loans was not a simple matter, debt-to-asset swaps were a possibility. “This could be done more often,” he continued.
Other methods, including increasing provisioning levels, which does not exonerate borrowers from their obligations, and debt forgiveness as part of restructuring agreements are also ways to reduce non-performing loans, although they come at a price, he added.
“All these are not easy to implement as there needs to be a balance, because writing down debt or reducing the interest rate or extending maturity has some negative impact on the equity of banks,” Demetriou said. “Therefore, these have to be applied with caution to avoid other problems”.
In a subsequent response to a question submitted by the Cyprus Business Mail, the central banker said that banks should also clamp down on strategic defaulters, even as such cases are difficult to spot with certainty.
“What the Central Bank of Cyprus asks from banks is when they detect borrowers who have the capacity to repay or have assets which could be used to pay back their loans, they then should proceed with all available measures against them,” Demetriou said.
In May, Georghadji said that parliament had to improve the unpopular foreclosure law, modernised three years ago and enacted in 2015 as part of Cyprus’ bailout terms.
Hellenic Bank’s attempt to auction a 263-square-metres foreclosed mansion in Engomi belonging to a family which repeatedly ignored the bank’s efforts to enter restructuring negotiations, attracted support from politicians of various opposition parties a week ago, including far-right Elam, and is also indicative of the support a bill to strengthen the current foreclosure law would enjoy at the parliament.