Cyprus: Non-performing loans

1. If we compare the situation between 2012 and 2013 with the situation before the Covid crisis and the war in Ukraine, where do your country stand today with regard to NPLs? How has been the recent evolution of NPLs in your country?

Soon after the outburst of financial crisis in 2011, the banking system of Cyprus was severely affected, and in 2012 Cyprus became the fifth county applying to the European Commission, The European Central Bank (ECB) and International Monetary Fund (IMF), for an economic rescue package, and thus the issue of non-Performing loans (NPLs) became once again relevant.
Following the banking system crisis in 2013 and the cut of the bank deposits in Cyprus, NPLs increased rapidly. Foreign companies took over the management of NPLs and proceeded with the filing of large volume of lawsuits into the Cyprus courts. Many banks started to implement the legislation of foreclosure of mortgaged properties, which were then auctioned.
In Cyprus, in line with other countries in Europe, the onset of the COVID-19 pandemic resulted in a reduction of expected NPL transactions. Non-performing loans at the end of 2021 amounted to 3 billion. According to data released by Eurostat, the EU’s statistical office, Cyprus was the country with the highest stock of general government non-performing loans (assets) in the EU in 2021, with the rate standing at 20.2% of GDP.
Please see table below, as found in the webpage of the World Bank, indicating the fluctuations in NPL for the years between 2008 and 2022.

The ratio of NPLs increased sharply from 18.375% in 2012 to 38.558% in 2013, according to the word bank data. Subsequently, in 2019 – a year prior to the health crisis of Covid-19, the NPLs has reached the lower amount of 17.903%. During 2020, the amount of NPLs reached 15.019% while surprisingly in 2022 the percentage in 2022 decreased to 7.659%. As it was stated in an interview of Elisabeth McCaul member of the Supervisory Board of the ECB on Cyprus News Agency on 16/06/2021, the upcoming gradual withdrawal of government support measures has the potential to lead to an increase in non- performing Loans (NPLs).
However, for the moment, as it is further reported by the Central Bank of Cyprus, a decrease is noted in NPLs at the end of February 2023.

2. Are non-performing loans in the post-Covid context, with the war in Ukraine and high inflation, a source of concern for banks and their financial solidity in your country?

In 2021, Cyprus remained the country with the highest stock of non-performing loans (assets) of the general government, at the rate of 20.2% of the GDP. This was due to a large transaction that took place in 2018, whereby non-performing loans from a Cypriot public financial corporation (classified outside government) were transferred to a governmental unit. Furthermore, from March 2020 to December 2020, the Regulation on the taking of Measures by Financial Institutions and Supervisory Authorities, revoked the obligation to pay instalments, including interest, on credit facilities grandest and/ or purchased and/ or managed by financial institutions. The relevant suspension concerned persons whose arrears in payment of the instalment were not more than 30 days from the date provided for by the credit facility in question on the 29th February 2020, and the delay stemmed from financial hardship as a result of the impact of the COVID-19 pandemic.
Much of the NPL problem has been resolved by the offloading of problem debt portfolios to asset management companies and a more robust approach to debt enforcement. However, the overall level of non-performing debt within the economy remains high and measures put in place as a ‘temporary relief’ during the Covid pandemic such as bans on foreclosures involving residential properties remain in force. There are concerns that the situation between Ukraine and Russia and the sanctions related to them may, if they persist for the long term, result in a new wave of economic hardship and consequential increases in commercial and domestic loan defaults. Sanctions against Russia have resulted in record inflation of energy bills due to a heavy dependency on imported energy. This is expected to challenge the ability of private and commercial borrowers to repay their debts as originally scheduled.
High inflation and gradually rising borrowing costs are likely to increase credit risk amid elevated private sector debt levels, while significant exposure to the real estate sector exposes banks and credit acquiring companies to collateral revaluation risks. In addition to risk monitoring, banks should proactively use all available tools to enable timely restructuring of viable businesses in financial difficulties; this should be helped by the recent transposition of the EU Restructuring Directive into national legislation.

3. Are you concerned about loans that have not been repaid for 60 days? What is the trend?

In Cyprus a non- performing loan is considered a loan that is 90 days overdue. If it is a current account limit, a non- performing loan is when the account is overdue for more than 90 days (regardless of the limit). Based on a relevant Central Bank Circular, when a restructured loan is only 60 days in arrears, the loan continues to be classified as a non- performing for a period of 6 months after the restructuring.
According to the data published on 18/07/2023 by the Central Bank of Cyprus, on 30/04/2023 the total loans with amounts overdue less to 90 days is €1.7million (7,1% ratio).

4. Do you consider that the level of transparency regarding NPLs in your country is sufficient? Do you have any idea of the current rate of NPLs in your country?

As observed from the recent financial stats of the Republic, we can see that the share of outstanding NPLS is improving. This leads to the conclusion that a better management system is now in place for the granting of loans and, according to the measures taken, many NPLs have been restructured.
The Central Bank of Cyprus publishes online Aggregate Cyprus Banking Sector Data on many topics including NPLs which are updated regularly providing tables and analysis on the rates and evolution of the NPLs.
According to statistics from the Central Bank of Cyprus in July 2023 the total percentage of non-performing loans on 31/12/2018 was 30.3%, while Cyprus NPLs Ratio stood at 9.0 % in March and April 2023, compared with the ratio of 9.3 % in the previous month.
The total amount of NPLs in the Cypriot banking system reached €2.19 billion in April, with the NPL ratio against total loans remaining unchanged at 9.0%. According to data released this month by the Central Bank of Cyprus, the total value of NPLs amounted to €2.19 billion in April, compared to €2.2 billion in the previous month. At the same time, the total amount of loans decreased to €24.33 billion in April, down from €24.43 billion in the previous month.

5. Is the ECB’s strategy to combat NPLs effective in your country (question only for countries of the Eurozone)?

Τhe ECB is the supervisory authority for the countries of the European Union. As a supervisory authority is particularly interested in tackling non-performing loans because it weakens banks and jeopardise their solvency. The issue of NPLs is one of the areas on which the ECB focuses its supervisory work and the ECB provides banks with extensive guidance on NPLs and its expectations.
In an Interview with Cyprus News Agency, Danièle Nouy, chair of the Supervisory Board of the ECB, 5 years after the financial crisis of 2012-2013, expressly recognised the efforts made by the Cypriot Banks in resolving the NPLs. She, further, makes clear that despite the efforts of Cypriot Banking System, additional and persistent efforts are still required to ensure that a sustained, long- term reduction in the stock of NPLs in the Cypriot Banking system can be achieved.
Since then, the Central Bank of Cyprus, following and applying ECB’s strategy, has developed standardised financial information templates for reporting by institutions on an at least semi-annual basis. To this end, the ECB’s strategy has also positively affected the interbank system in Cyprus in many areas including NPLs.

6. In your opinion, does the ECB’s policy provide sufficient incentives to limit risks linked to NPLs? Does the ECB’s policy regarding NPL’s entail counterproductive effects in your country?

In our opinion the extraordinary support measures helped to prevent a sharp increase in bankruptcies and NPLs. The quality of banks’ assets remains a source of concern, as the full impact of the pandemic may only manifest itself in the medium term, after most of the extraordinary government support programmes have ended.

7. Have the measures to reduce non-performing loans and Directive (EU) 2021/2167 had a significant impact on the situation of NPLs?

Since 2014, a number of measures were used to tackle the NPLs problem, including amongst others loan restructuring programs, stricter provisioning requirements, and the establishment of an Asset Management Company, to manage distressed assets, Loan payment Moratoriums, Financial Support Scheme to aid businesses and individuals facing income loss due to pandemic, the purchase of loans by Credit Acquisition Companies, the introduction of state-funded schemes responsible to resolve NPL involving primary residential immovable property of the creditors, introduction of more flexible reconstruction and foreclosure policies in order to help creditors perform their loans and planned mortgage-to-rent schemes for vulnerable households may help resolve socially sensitive NPLs.
The measures to reduce non-performing loans have brought positive impact, as noted above, since the percentage of non-performing loans in Cyprus from 2018 to date has decreased significantly. For the transposition of the above Directive into national legislation, several bills have been proposed, yet not enacted, such as “The Credit Managers and Credit Purchasers and Related Matters Act of 2023”, “The Consumer Credit Contracts (Amendment) Act, 2023”. Nevertheless, “The Consumer Credit Agreements in respect of Residential Property (Amendment) Act, 2023” has been enacted transporting certain provisions of the above Directive into national legislation.
Furthermore, the Personal Insolvency Act 2015 has been enacted to tackle NPLs, which provides a statutory arrangement for resolving unsustainable debs of an individual. From our experience many borrowers’ recourse to the provision of the law, and such cases end up in courtrooms.
Nonetheless, research has shown that a high ratio of NPLs persists which creates a long term disproportion in the economy. Therefore, the reduction of non-performing loans remains a challenge.

8. Is the secondary market sufficiently liquid and deep to absorb surplus NPLs in your country?

According to the annual report of the Ministry of Finance of Cyprus, non-performing loans have fallen to 11% of total loans, with banking institutions maintaining high capital buffers while key interest rate increases are supportive of their profitability prospects. As regards liquidity, Cypriot banks continue to maintain relatively high reserves with the Liquidity Coverage Ratio and the Net Stable Funding Ratio significantly exceeding the minimum regulatory requirement. Liquidity is mainly funded by deposits, with the share of other instruments, such as bonds, remaining low.
The development of a secondary market for NPLs in Cyprus aimed to facilitate the resolution of distressed assets, enhance efficiency of Bank sector, attract investors interested in distressed debts opportunities. Many credit acquiring companies has been established in Cyprus and many banks have been sold their distressed debts to them. According to a Central Bank list the number of Credit Acquiring Companies Licenced by the Central Bank of Cyprus accounts to 11.

9. Are NPLs an important issue in your country?
Yes. Without doubt NPLs was always an extremely relevant subject in Cyprus economic policy. The Cypriot government, together with the Central Bank of Cyprus were striving to reduce the ratios of NPLs over the years. In the past years, the significant and uncontrollable issue of non-performing loans, alternatively referred to as ‘red loans’, has seen a rise in both private loans and household loans, nevertheless, such efforts have contributed to a decline in NPL ratios in Cyprus in the recent years.
In 2021, Cyprus remained the country with the highest level of non-performing loans, according to data released by Eurostat. This was due to, as already mentioned above, a large transaction in 2018, whereby non-performing loans from Cyprus Cooperative Bank Ltd (classified outside government) were transferred to a government unit. Additionally, the conversion of the residual entity to an asset management company had a substantial effect on total NPLs held by the country’s banking sector, which almost halved to EUR 11 billion by September 2018. Following multiple sales to international investment funds, this amount stood at EUR 2.3 billion as at the end of February 2023.
As seen from the latest estimates of the Statistical Office, in the first quarter of 2022 on an annual basis, the seasonally adjusted GDP, at constant prices, showed an increase of 6.3%, while in the second quarter of 2022 an increase of 6.2% was recorded. As mentioned above, from 2018 until today, the percentage of NPLs has decreased significantly and this is certainly a factor that has contributed to the improvement of the Cypriot economy.

10. Is this an issue that is under control in your country?

As abovementioned, the issue of NPLs seems to now be under control. Significant progress has been achieved in improving banks’ resilience, but vulnerabilities remain.
The banking sector remains highly liquid and well capitalised, capital ratios are comfortably above regulatory requirements; higher interest rates, as well as progress in lowering fixed costs through voluntary staff exits, helped raise traditionally low profitability in 2022, after years where the profitability was negatively affected by both provisions and the low interest rate environment. With key interest rates rising following recent decisions by the European Central Bank, a significant removal of the pressure on profitability is expected. Nevertheless, the strong capital position is encumbered by still-high NPL ratios, and household and corporate sector indebtedness, although on a declining trend, remain among the highest in the euro area, pointing to borrower-side vulnerabilities.

11. For non-Eurozone Member States, are you subject to standards in your country that differ from those of the European Central Bank? Are they more or less stringent?

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12. For non-Eurozone Member States, how do your banks approach transactions with banks in the Eurozone? Do you perceive any additional risk in trading with Eurozone banks?
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[The questions and answers above appear in International Review of Financial Services, Volume 2023, Number 3]