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Banks in Cyprus should assess mortgages based on RPI, CBC says

20 March, 2014

Commercial banks should establish the proper procedures to adjust the market value of mortgages on the basis of the negative divergences of the Residential Property Price Index, Central Bank of Cyprus said in a circular.

The new circular comes in the wake of renewed criticism to banks over their practices for loan restructuring for troubled borrowers. Debt restructuring is considered a key element for the stabilization of the island`s banking sector that came close to collapse in March last year when the government agreed on €10 billion financial assistance with the European Commission, the European Central Bank and the IMF.

"The credit institutions should regularly monitor real estate values, at least on annual basis regarding commercial properties, on a three-year basis when it comes to residences and more frequently when market conditions are subject to significant fluctuations," the CBC said.

The CBC calls on credit institutions to apply a "fair and viable pricing policy regarding loan restructuring which aims at minimizing cost, levies and loyalties, other expenses and interest rates for borrowers subject to loan restructuring."

"In order to work out proper and viable restructuring solutions, the credit institutions should carry out a thorough analysis of collateral," the circular said, adding that a loan facility could be considered as covered by collateral only when the value of collateral equals the market value of the mortgage on the basis of its initial independent valuation that has been reduced accordingly.

If immovable property has been pledged as collateral, the credit institutions should carry out an independent professional evaluation to calculate the market value and the forced sale value of the collateral, in case the collateral constitutes an alternative source of debt repayment or the credit institutions require borrowers to examine the possibility to provide other assets as additional collateral.