The smaller Cypriot banks should follow the path set by larger ones in reducing their stock of non-performing loans, Constantinos Herodotou, Governor of the Central Bank of Cyprus, has said, stressing that Cypriot banks should not utilize their excessive liquidity to rush to give loans without scrutinizing the borrower’s repayment capacity.
Speaking to a lunch hosted by the Nicosia rotary club, Herodotou said the Cypriot banking system has recorded “immense progress” reducing its stock of NPLs from their peak of €28 billion to the current level of €9.5 billion, registering a reduction of 68%.
Noting that the current NPL level is at 32% of total loans, Herodotou said that the Cypriot banks need to do more in converging with the 10% which is the threshold set by the Single Supervisory Mechanism and the 3% NPL rate which is the current NPL average in the EU.
Herodotou assured the SSM does not expect the Cyprus NPL rate to drop from 30% to 10% in a year, but noted that “they want to see a credible part sufficient progress so that within a reasonable amount of years you will approach that 10% threshold.”
“I think our big banks have been demonstrating that recently and that is every pleasing but I think we need to encourage the smaller banks to do so because now they can see what has worked for the bigger banks,” the CBC governor said.
Noting it is “absolutely normal and expected” for bigger to lead the way in NPL reduction, Herodotou added that smaller banks need to plan NPL reduction through their business model.
“But they need to prioritize this and I repeat again the path has been shown by the biggest banks,” he added. Smaller banks are directly supervised by the CBC and not by the Single Supervisory Mechanism.
Furthermore, Herodotou highlighted the majority of NPL reduction has been achieved through sale of loans which have been offloaded to credit acquiring companies (CACs).
“One we should never forget that they stay within the economy, so our households, small and medium sized companies and big enterprises continue to have those NPLs,” he said stressing that these loans should be resolved in way consistent with the economy and the CBC’s code of conduct.
But he added that the positive effect of loan sales is that it “stabilizes further the banking sector as it gives more ability to the management of banks to focus on the actual business of doing banking.”
Furthermore, Herodotou referred to the excessive liquidity featuring the Cyprus banking system noting that Cyprus banks should not rush to give out loans, despite the fact that they are sitting on “piles of liquidity.”
“There is no liquidity issue with any bank in Cyprus, but at the same time there should be no rush in giving out loans, we should not repeat the mistakes of the past. Yes there is excess liquidity, yes our banks are facing two challenges, one is NPLS the second is profitability, but we should not allow the banks to rush to give out loans,” he said.
Banks, Herodotou went on to say, should evaluate the risk of the loans, the capability of the repayment and only when those loans have a sound business case and a sound repayment case then the banks should be left alone without any pressure to give out the loans they deem good for their balance sheet and their operations.
“And if the banks overdo it then is the job of the regulator to change the regulatory requirements either because the banks are over doing it or because we see as Central Bank that certain sectors are overinflating, in order to avoid another curse I think of our country which is going from bubble to bubble, we need to start preventing the bubbles from being created” he stressed;
Stating that bubbles are always happening in every economy and that this is a local phenomenon, Herodotou added “we need to be more preemptive in that respect.”