“Banks can ensure collection of loans by managing NPLs more efficiently”
The Central Bank of Cyprus (CBC) started releasing data on non-performing loans (NPLs) of both commercial and cooperative banks in June 2013. Ever since, NPLs as a percentage of total credit facilities continue to rise. However, although they rose from 30.6% in June 2013 to almost 51% in November 2014 (latest available data), something that corresponds to over EUR 7 bln of additional non-performing debt, NPLs restructuring has been very slow with the percentage of restructured on total non-performing loans not having exceeded 12% during the aforementioned period (CBC, 2015).
In particular, as of late November 2014, only 11.1% of NPLs, equating to loans worth EUR 3.1 bln, had been restructured. As far as credit facilities to legal entities (mainly corporations) are concerned, the construction industry was the one to display the highest restructuring rate; by the end of November, 25.3% of the sector’s non-performing loans had been restructured. It should be noted that Construction displays the highest percentage of NPLs with 78.7% of the loans granted to corporations active in the industry not being serviced. The NPLs to developers and contractors that have been restructured account for over EUR 1.4 bln representing therefore more than 46% of total NPLs restructured. High restructuring rates have been recorded in the Transportation and Health industries exceeding in both cases 30%. Restructured NPLs in the real estate and tourism (accommodation & food services) industries reached 15.6% and 16.1%, respectively. Credit facilities to private individuals, of which more than half (51.7%) are classified as non-performing, the average restructuring rate reached 8.3%, 9.9% for housing and 6.6% for consumer loans. Of the EUR 4.3 bln worth loans granted for the purchase or construction of owner-occupied immovable property that are not being serviced, only EUR 378 mln had been restructured by the end of November 2014.
Loan restructuring refers mainly to the extension of their repayment periods, and/or ‘temporarily’ decreasing monthly instalments. In some cases, restructuring involves decreasing interest rates or waiving part of the capital and/or the interest due.
Moreover, the complex procedures that need to follow in order to proceed with loan restructuring are considered to be an obstacle to their effort; for this reason various stakeholders have already submitted a demand to the CBC asking for the simplification of the process. Finally, the approval of a bill for property divestment and of an appropriate insolvency framework are also believed to be critical for the acceleration of restructuring rates within 2015.
Banks could secure the collection of significant parts of loans that are currently not being serviced (and, therefore, increase their revenue and liquidity), by managing their NPLs more efficiently. A more effective management approach comprises the restructuring of loans that are classified as non-performing but are still considered ‘viable’. On the other hand, there are no obvious benefits resulting from the delay of the restructuring process; quite to the contrary, the danger of a new crisis in the Cypriot banking system is posed by the accumulation of huge amounts of NPLs in it. NPLs therefore act as an obstacle for the recovery of the local economy.
The ‘new’ Bank of Cyprus (and the other recapitalised local banks) can contribute to growth by granting low interest rate loans and proposing ‘smart’ NPL restructuring solutions. Cyprus’ level of NPLs is the highest among European countries. For the economy to be able to return to and sustain growth, household and corporate debt need to be significantly reduced.
Banks should promptly proceed with writing-off default interests and overcharges on overdue loans including interest on capital that debtors will never be able to repay mainly because of previous usurious charges imposed by the financial institutions.
A few months ago, six years after its banks went bankrupt, Iceland proceeded with a haircut of household debt by subtracting value of housing loans mainly. It is estimated that this initiative will directly benefit about 85% of households and that write-offs will near EUR 25,000 per debtor. It is important noting that Icelandic households and corporations never reached the levels of lending of their Cypriot counterparts.
Finally, although deposit interest rates have been significantly de-escalated, existing and new lending rates remain at artificially high levels and have not been proportionally reduced. ‘Fuelling’ businesses with new but notably cheaper money is a necessary move to reboot the economy.
The government should search for a solution for the huge debt gathered for households and businesses and consider (under specific terms and conditions) a ‘private debt relief’ programme having of course calculated its impact on local banks.