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Central Bank of Cyprus issues directive for strict loan origination process

05 December, 2013

Central Bank of Cyprus has issued a directive imposing stricter loan origination criteria both in the commercial banks and the cooperative credit institutions.
Under the directive, "the most important criterion which the credit institutions should consider, when assessing an application for granting a facility, is the customer’s income and source of repayment and eventually customer’s ability to repay."

So far the Cypriot banks had no codified code of practice in loan origination and used collateral value as the main criterion for approving a loan application. Last March the Cypriot banking system came at the brink of collapse, when the government agreed with its international lenders on a €10 billion bailout, featuring haircut on deposits over €100,000 to save the island`s two largest banks, which under a due diligence audit will post losses of nearly €8 billion until 2015, due to asset quality deterioration. The Coops which were mainly exposed to household loans posted a capital shortfall of 1.4 billion and were nationalized after a capital injection by the government.
"Collateral by itself should not be under any circumstance a criterion for approving a loan and cannot by itself justify the approval of any facility without compliance with the aforesaid lending criteria," the directive note.

The directive stipulates that the credit institutions should receive data with regard to the applicant be the natural persons or corporations on their financial status.
"The ability to repay a facility is the main requirement for any funding. Therefore the assessment of future repayment capability is the most important factor to be considered in the assessment procedure when approving a facility," it says.
It request the banks to collect information on the financial status, inter alia income statements, bank statement, income tax returns, VAT and social insurance securities, as well as audited annual financial results and cash flow in case of corporations. The banks are instructed to set monthly installments at 35% of the applicant income, or its Estimated Monthly Savings, which essentially is a persons or household balance sheet, covering all expenses even car park.

Bankers voiced concern whether customers will be able to come up with such a demanding set of information.
"In the past the banks and the Coops lent persons with minimum information. But we should not go to the other end in an environment so strict that would be so strict as to not lend anyone," Marios Clerides President of the Association of Commercial Banks said on Tuesday.

On the handling of collateral, the directive stipulates that the banks should implement a Loan to Value ratio which should not exceed 80% in case the facility is granted for financing the primary permanent residence, whereas the ratio should no exceed 70% for all other property financing cases.
The directive calls for caution in case of lending land developers. "Lending to developers or project finance is of high risk and as such, credit institutions should make sure that relevant staff has the appropriate experience, qualifications and expertise to deal with it," it said.

Press reports suggest that Bank of Cyprus the island`s largest lender which has absorbed Cyprus Popular Bank that will be wound down, has huge exposure to developer loans with non performing loans in the sector amounting to €6 billion. NPLs are estimated at 45% of total loans.