Non-performing loans remain the main problem affecting the Cypriot banking sector, despite the decline recorded in 2016, the Governor of the Central Bank of Cyprus (CBC) Chrystalla Georghadji warned on Friday, stressing that the intensification of restructuring processes and effective implementation of the insolvency framework introduced in 2015 are necessary to accelerate the reduction of NPLs.
“While economic conditions are clearly improving, challenges remain. The banking system has very high levels of non-performing loans and must be drastically reduced in order to ensure the smooth financing of the economy and the consolidation of the balance sheets of credit institutions” Georghadji told the press.
In its report for 2016, the Central Bank stresses that “the risks to the GDP are assessed as balanced” and revises upward its projections for the Cypriot economy for the period 2017-2019, despite the deterioration of the international economic climate, expecting a recovery of 2.8% in 2017 and further growth of the Cypriot economy by around 3% over the next two years.
“The expected course reflects, in part, the positive course of investments already underway the sectors of tourism, construction and other business” the CBC said in its 2016 annual report, noting, however, that the high level of NPLs continues to be a major challenge and an obstacle to the full recovery of the sector and the domestic economy in general.
In her introductory speech, Georghadji said that the “geopolitical developments are likely to affect the economic developments in Cyprus” and assured that the CBC will continue without complacency the efforts to fully consolidate the country`s banking system and the economy in general.
She said, however, that the banks have already taken a number of necessary actions to deal with the problem more successfully and as much as possible.
“The number of restructurings has increased and a substantial trend towards more sustainable restructurings was observed in 2016. Also, there is an increasing trend in the amounts received from non-performing loans” she noted.
She said that non-performing loans for the domestic operations of banking institutions declined to €23.7 billion at the end of 2016 compared to €26.7 billion at the end of 2015.
“Of course, in order to resolve the problem, besides improving economic indicators such as GDP, unemployment and property market conditions, it is also necessary to strengthen the actions and cooperation of all the parties involved”, she underlined.
Replying to a question, the Governor of the Central Bank said that it will take eight to ten years to fully address the problem of the NPLs, provided that the economy continues to grow by at least 3% in the next years.
She explained that there are five types of solutions for the NPLs, the first is the general one which relates to growth, it will boost incomes and reduce unemployment and in turn enable borrowers to repay their loans.
She then referred to internal measures to tackle the problem that is the restructurings, noting that the banks and the borrowers should try to find viable restructuring solutions, including exchanging debts for assets and partial debt write-offs, which herself does not suggest, as she said.
She said that another solution would be securitization. The Central Bank, she added, will issue new guidance on this as soon as a relevant regulation being processed by the European Commission is approved.
The Governor said that another idea would be the establishment of an Asset Management Company, at national level “because there is much that can still be done” but added that the “the big problem with this solution is the funding of this company”.