Further increase in loan demand recorded in Q1 2020 despite measures for COVID-19

Net demand for loans in Cyprus has recorded a further increase in the first quarter of 2020, a development that is reflected, according to a survey by the Central Bank of Cyprus (CBC), in the positive GDP growth rate in the first quarter of this year despite adverse developments recorded in March in connection with the coronavirus pandemic.

However, the demand for loans by households, according to the survey, remained in the first quarter at the same levels of the previous quarter, ie unchanged, both with regard to housing and consumer and other loans.

The CBC’s survey of April 2020 covers the first quarter of the year and includes only the beginning of the restrictive measures and actions of the Government of the Republic of Cyprus to address the spread of the pandemic.

Regarding the expectations of the participating banks both in Cyprus and in the euro area, the CBC notes that these expectations were formed during the period when the restrictive measures were in full force and there was great uncertainty in regard to the period of their gradual withdrawal.

In comparison, in the euro area, according to the CBC survey, there was a significant increase in net demand for loans from businesses, as well as an increase was recorded in net demand for loans by households for housing purposes. On the contrary, the demand for loans from households for consumer and other loans decreased.

Moreover, regarding the expectations of the participating banks in Cyprus for the second quarter of 2020, the net demand for loans from companies was expected to remain unchanged.

On the other hand, during the same period, net demand for loans from households was expected to decline for the first time since the fourth quarter of 2014, mainly due to uncertainty regarding the evolution of the pandemic.

In the euro area, the demand for loans by businesses was expected to increase further and to a large extent, in part due to increased demand as a result of the pandemic and high uncertainty, which was, however, compensated by government guarantees for loans in most euro area countries.

As in Cyprus, according to the CBC survey, net demand for loans from households in the euro area was expected to decline for all loan categories reaching historically low levels.

Regarding the factors related to the criteria for granting loans to businesses, the CBC survey showed that they remained unchanged in the first quarter of 2020.

Regarding the terms and conditions of granting loans or credit limits to businesses, overall they remained substantially unchanged compared to the previous quarter.

The CBC notes in its survey that the reduction of banks` margin for ordinary loans, mainly due to competitive pressure, does not substantially affect the overall terms and conditions for granting loans or credit limits to businesses and consequently nor the overall course of lending.

Finally, the CBC notes that heterogeneity was observed among the participating banks in terms of the direction of expectations for the lending criteria.

Uncertainty as to the impact of the effects of the coronavirus pandemic and final programs for state support with regard to private sector lending may have affected banks` estimates unevenly, the survey concludes.