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Troika should allow CBC to make NPL definition milder
By Antonis Hadjichristodoulou
The swelling of NPLs in Cyprus during the past 12 months is largely due to the sudden change of the definition of NPLs by the Central Bank of Cyprus (CBC) in mid-2013. The new definition, prescribed by the Troika, is very strict compared not only to all other bailed-out southern EU countries but to economically advanced EU states too. We could not, therefore, agree more with BOC CEO John Hourican who recently described the new CBC definition as “foolish”. NPLs in the island can only decrease to more acceptable levels and ratios if, together with the other measures (proper restructuring, lowering of lending rates, pressing those who can pay, etc.), the NPL definition in Cyprus is made milder, at least for the next two crucial years.
The Troika has no excuse whatsoever to reject such a change of NPL definition, if well justified and documented by the Cyprus authorities. After all, the Troika has tolerated relative relaxations in other bailed-out EU countries. If the definition of NPLs in Cyprus remains unchanged, the recession will certainly be prolonged because the current definition traps, unnecessarily, excessive amounts of capital for the local banks/co-ops which are therefore unable to finance the long-awaited growth and development of the local economy.
Comparison of NPLs definition applying in Cyprus since mid-2013 with the definition applying in several other EU countries:
(a) As far as the basic NPL criterion is concerned (arrears in excess of 90 days irrespective of collaterals), the Cypriot banks/Co-ops are since mid-2013 on the same footing as their European counterparts, with the exception of banks in Greece where a housing loan becomes NPL only after 6 months arrears (as against only 3 months in Cyprus and other EU countries). Discrimination against Cyprus Number 1.
(b) In addition, there are in place some additional rules in the EU to classify a loan as an NPL. While all these additional rules are currently being applied strictly by Cypriot banks/Co-ops, this is not so in a number of other EU countries. The Troika and/or the European Central Bank are tolerating relaxations in other EU countries, as the following striking instances indicate:
In Greece, Austria and Germany, loans restructured are no further considered as NPLs, provided of course that the new repayment programme (which might provide for a grace period and/or the payment of interest only for an agreed period of time) is subsequently being observed by the customer. In Cyprus, however, a bank loan which is restructured (even with 60 days arrears) has to stay in the category of NPLs for a minimum period of 6 months. Discrimination against Cyprus Number 2.
In Portugal, only the loan amounts in arrears count as NPLs, in Cyprus the entire balance of the loan (of an individual or a business) with arrears over 3 months is characterised as an NPL.
Example:
A housing loan of 400,000 euros has arrears amounting to 8,000 euros over 3 months. A Portuguese commercial bank will present in its books an amount of only 8,000 euros as an NPL against such a loan whereas a bank/Co-op in Cyprus must characterise the entire loan it (ie. 400,000 euros) as an NPL. Discrimination against Cyprus Number 3.
In Cyprus, banks/Co-ops apply the customer cover rule as against the account cover rule applying in other EU countries. Based on the much stricter customer cover rule, if the percentage amount of the non-performing loan of the customer to his (hers) total loans exceeds 20%, then all the customer loans are characterised as NPLs. Based on the account cover rule, however, only the specific loan in arrears over 3 months is considered an NPL.
Example:
A customer has 4 loans of 250,000 euros each. Only one loan is problematic, with arrears over 3 months amounting to 50,000 euros. Whereas in most of the EU countries this customer’s NPLs would amount to 250,000 euros (balance of problematic loan), in Portugal only an amount of 50,000 euros would be considered as non-performing (arrears amount of the problematic loan only). In Cyprus, however, based on the customer’s cover rule, this customer’s NPLs would amount to 1 mln euros as the amount of the problematic loan (250,000 euros) is higher than 20% of the customer’s total loans (1,000,000 euros). Discrimination against Cyprus Number 4.
Finally, we could not agree more with the CBC Directive that new loans should be granted by banks/Co-ops only to customers with repayment ability and not to those who can offer satisfactory mortgages, irrespective of their cash-flow. However, when restructuring of an existing unsecured customer loan takes place in Portugal and Spain and the bank involved improves its position by strengthening significantly its tangible collaterals as part of the restructuring agreement, then the loan can be classified as performing after being restructured. No such relaxation exists for Cyprus. Discrimination against Cyprus Number 5.
*Antonis Hadjichristodoulou holds a B.Sc (Econ) from the London School of Economics and an MBA from Cass Business School City Uni London. He has worked for 35 years in two banks in Cyprus in their credit risk departments. Currently he is a visiting lecturer at CIIM (Finance and Banking) and a consultant at Grantxpert Consulting Ltd. Email: tonis.hadj@gmail.com
