“Banks can en­sure col­lec­tion of loans by man­ag­ing NPLs more ef­fi­ciently”

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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