Stricter requirements lead supply and demand for new loans to a fall

Stricter requirements are set by the banks, leading to reduced supply and demand for new loans, during the third quarter of 2022, for all loan categories, according to the results of the Bank Loan Survey (BLR) for October 2022, published by the Central Bank of Cyprus on Thursday. The survey examines the changes in lending criteria and loan demand that occurred in Cyprus in the third quarter of 2022 compared to the second quarter of the year. It also shows the changes expected to occur in the fourth quarter of 2022 compared to the third quarter of 2022.

According to the Survey, in the third quarter of 2022, the requirements for granting loans to both businesses and households were tightened compared to the previous quarter. Banks' perception of increased risk as well as their reduced risk tolerance for business loans contributed to the adoption of stricter lending requirements. Specifically, the banks' assessment of increased risk was related to the general financial situation and outlook, the solvency of borrowers, the prospects of the housing market and the collateral required for business loans.

For the fourth quarter of 2022, banks expect even more stricter lending requirements in Cyprus for all loan categories, due to the expected slowdown in economic activity resulting from the negative economic impact of geopolitical developments, as well as the negative impact of intensifying inflationary pressures both in household disposable income and in business profits.

Regarding the demand for new loans, the survey shows that net loan demand in Cyprus from businesses and households in the third quarter of 2022 recorded a decrease compared to the previous quarter. The net decrease in business loan demand is mainly attributed to reduced demand for fixed investment financing, which appears to be affected by increased uncertainty, as well as the upward trend in interest rates.

On the other hand, there was an increased demand for inventory and working capital financing, due to increases in energy and raw material prices as well as due to disruptions in supply chains.

As for households, the banks attribute the net decline in mortgage demand to the upward trend in interest rates, deteriorating consumer confidence and a less favorable estimated housing market outlook. Accordingly, the decrease in demand for consumer loans is due to the decrease in consumer confidence, the increased level of interest rates and the decrease in spending on the purchase of durable consumer goods.

The negative effect of inflation on households' real disposable income appears to postpone their consumption decisions. According to banks' expectations for the fourth quarter of 2022, net loan demand in Cyprus is expected to decline further compared to the previous quarter, both from businesses and for households.