Georghadji says NPLs partly fault of strategic defaulters

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By Stelios Orphanides

Central Bank of Cyprus Governor Chrystalla Georghadji said that an ongoing study of the bank supervisor showed that while the increase in bad loans over the past years was partly caused by strategic defaults, the main reason was a fall in incomes.

“The main reason for the increase in the non-performing loans in Cyprus is the unprecedented economic crisis, which led to a dramatic decrease in income,” Georghadji told delegates at a conference in Nicosia on Thursday according to the emailed transcript of her speech.

“Nevertheless, it seems that a small but non-negligible portion of households was, or still is, not servicing its loans despite the fact that they could do so with a reasonably manageable degree of difficulty. This alludes to possible strategic default behaviour by a proportion of borrowers”.

While Georghadji gave no further details on the exact dimensions of strategic defaults, she added that the assessment of the financial capacity of borrowers remains key both to designing effective policies to prevent borrowers able to repay their debts from opting not to do so and to fine-tuning loan restructuring strategies. The study containing information on strategic default “will be published soon”.

Non-performing loans in the Cypriot banking system make up roughly half of the banks’ loan portfolio and one and a half times Cyprus’s gross domestic product and are considered to be the number one challenge the Cypriot economy faces. Cyprus modernised its foreclosure and insolvency legislation last year in an attempt to help banks reduce their non-performing loans and effectively tackle strategic defaulters.

The central bank governor said that there are “positive signs” indicating a gradual recovery in the banking system and an ease in the non-performing loans which fell in February to €26.8bn from €27.3bn in December 2014.

“Within this figure, an amount of €10.9bn relates to exposures that have been restructured but are still under observance and will only be classified as performing once they exhibit capital repayments for at least 12 months,” she said. “In addition, the pace of non-performing loans restructuring has accelerated in recent quarters, with the outstanding balance of total restructured exposures reaching €14.2bn at the end of February 2016 compared with €12.9bn at the end of 2014”.

While the cure rate of loan restructurings agreed from January 2014 onwards rose to an “encouraging” 76 per cent, it will take up to five years before the problem “starts to be resolved,” she added. “I feel confident that with intensive efforts from all involved parties we will succeed”.

Georghadji added that while stakeholders have to decisively us all available tools, which apart from restructurings and foreclosures also include the sale of loans.

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