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In search of new tools for NPLs

18/02/2016 14:43
Bankers are turning towards the option of creating a secondary non-performing loans’ market as well as other innovative solutions, as they are looking for ways to reduce the volume of €27 billion of problematic loans that piled up in the balance sheets.

The need to find innovative solutions to the problem of NPLs, was stressed at a recent conference organized by the ministry of finance and the Cyprus chamber of commerce and industry in cooperation with the Cyprus Economic Society.

According to the executive director of the Central Bank of Cyprus George Syrichas, banks begun dealing with problem of NPLs with newly available legislative and administrative tools and this is evident by the increased rate of loan restructurings.

During his presentation at the conference, Mr. Syrichas said that 72% of restructured loans are cured but banks only receive 58% of the cash owed to them.

This means that a large number of restructured loans only partially cover the installments provided in new loan agreements.

CEO of the Hellenic Bank Bert Pijls, noted in his presentation that the high NPLs ratio to total loans (49,6%) and to GDP (136%) indicates the magnitude and depth of the problematic loans portfolio.

He stressed that the untested processes established by new laws, the populist public debate, and the strategic defaults and the moral hazard they cause, are challenges in resolving NPLs, as is the new regulatory regime, the labour environment in banking and the slow judicial system.

Mr. Pijls said that high NPLs depress bank profitability and restrict new lending.

A secondary market for NPLs would facilitate disposals, reduce collection burden on banks and free up capital and resources to support new lending, he argued. He also referred to solutions such as debt to equity, sale and leaseback and shared equity in real estate.

Still a long way to go

The head of national financial systems unit of the EU Commission Filip Keereman, said that in some of the eight program countries, NPLs are declining, but not yet in Cyprus in a decisive way.

He referred to increased provisions to encourage NPL work-out and noted that profitable and well capitalized banks are required for this.

He added that aggressive increase in provisions is hampered by the poor profitability of banks. In such a context, banks' internal reorganization and the setting of targets for debt restructuring have a relatively greater role to play, according to Mr. Keereman.

As regards strategic default behavior, he said that it is to be addressed by making effective use of the foreclosure tool and developing greater access to information on income and wealth of borrowers.

NPL tools

In his presentation Mr. Syrichas referred to tools for dealing with NPLs, such as loan restructurings and sales. He also referred to restructuring targets set by the Central Bank to monitor their performance.

He noted that based on historical data collected by the CB, the size of strategic defaults can be estimated to some extent.

The former CEO of NCR Corporation Lars Nyberg referred to different ways of tackling the problem of NPLs in different countries.

He noted that for many banks incentives to sell NPLs have decreased over the last years.

“If corporate NPLs are not restructured ‘zombie’ companies slow up economic recovery” he said adding that banks with high NPL ratios are vulnerable in a future crisis and that risk is pushed over to the state.

The head of the restructurings and recoveries department at Bank of Cyprus Nick Smith, referred to innovative solutions noting that solving NPLs would restore customer confidence through reward cooperation and zero tolerance to non-cooperation.

He stressed that priority focus is on cashflow and not collateral while for complex businesses tailored solutions are provided.

Oliver Wunsch of the IMF said that NPLs are a common characteristic of the financial crisis.

He said that high debt remains an obstacle to dealing with NPLs and new loans.