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CB Governor: NPLs determine rates

27/01/2014 09:20
A reduction in lending rates will be achieved with the reduction in the level of the NPLs and the improvement of the monetary transmission mechanism, Central Bank Governor, Panicos Demetriades stated today.

Speaking to a seminar on the arrears management, he said a reduction in the level of NPLs will result in lower provisioning requirements and this will contribute to the decline in interest rates in the long run, to the benefit of households and businesses.

At the same time, adequate capital buffers will be created thus strengthening the resilience of banks in the future.

According to Mr. Demetriades, unfortunately, for many years the banking sector in Cyprus, in common with some other countries, adopted poor risk and credit management practices, dominated by asset based lending, and an overexpansion of the real estate market.

A new loan origination directive was issued by the Central Bank, providing guidance as to how origination and review applications for lending should be assessed. This new directive aims to shift lending from asset based criteria to assessing the ability to repay. Indeed, asset based lending is no longer acceptable and ability to repay should be the main criterion that governs a credit approval decision. Collateral should be just that, an added layer of security in case things do not evolve as expected, and should not be expected to be the primary source of repayment.

Credit institutions operating in Cyprus are now required to establish an appropriate framework for the effective management of arrears and loan restructurings of borrowers in financial difficulties.

“The Central Bank expects our banks will play a significant role in the efforts made to establish the right environment for arrears management, by placing the utmost importance on the correct application of the above directives”, he added.

An assessment of the credit institutions internal effectiveness, operational capacity, and arrears management policies, procedures and practices for the different sectors in the market will be conducted in the first half of 2014.

“The emphasis remains on restructuring loans on the basis of fair pricing in order to achieve a viable repayment schedule which will assist the borrowers` business and financial condition, contribute to economic recovery and safeguard the interests of banks”, he stressed.

“A distinction should be made by banks between those borrowers who are cooperative and willing to meet repayments in line with their financial capacity, and those who are able to repay but are unwilling”, the Governor added.

“Banks should and are continuing to reorganise themselves internally to prioritise the management of arrears and become well equipped organisations in risk management. It is expected that the focus on this area will continue”.

According to Mr. Demetriades, restructuring and cleaning up a bank’s balance sheet is not easy, and market conditions remain challenging. A change of culture and thinking is needed to improve things in the short term, and ensure the effective functioning of the system in the medium and long run.

“The Central Bank is fully committed to the implementation of the programme agreed with the international lenders. I remain positive that the Cyprus economy will come out stronger from the current crisis”.

“An efficient and well operating arrears management function across banks will assist in once again creating healthy bank balance sheets as well as improving liquidity, profitability, and capital. It will also have a key role in restoring confidence in the sector and in the wider economy. Effective arrears management should be expedited and form part of the immediate implementation strategy and plan at every credit institution”, M. Demetriades concluded.