* High stock of NPLs starting to reduce
Central Bank Governor Chrystalla Georgadji has said she is optimistic about the course of both the economy and the banking system, as the island edges closer to its exit from its three-year economic adjustment programme, which expires in March.
In an interview with the Cyprus News Agency, Geoghadji said the first signs of a reduction in the high stock of non-performing loans have started to appear and added that the improvement of the marcroeconomic environment which in turn will contribute to a reduction in the NPLs constitutes an essential prerequisite.
Georghadji said the economy consistently out-performed the projections of international lenders, registering GDP growth of 1.6% in 2015, to be followed by growth which may exceed 2% in the current year.
“The recent economic developments were better than those anticipated by our international lenders, particularly concerning the growth rate of 1.6% in the previous year and an expected growth rate above 2% in 2016,” she told CNA.
Georgadji said the growth rate increase will have a positive impact both on the labour market as well as on the reduction of NPLs, which in turn will benefit economic activity, as borrowers are relieved and consumption is strengthened, improving the banks’ balance sheet which will have bigger incentives to provide new credit and finance the economy.
On the banking sector, Georgadji said that following the events of 2013, Cyprus’ major banking institutions have passed the 2014 EU wide stress test and enjoy today “a strong capital” base, adding that the banks have increased the coverage ratio without having to raise capital, whereas the Cooperative sector received additional state aid of EUR 175 mln, after the state capital injection of EUR 1.5 bln in 2014 from bailout funds.
“The level of NPLs remains the biggest problem facing the banks,” Georgadji pointed out, adding that apart from the creation of internal restructuring units in the banks, the improvement of the macroeconomic environment, which remains as an essential prerequisite, is expected to gradually ease the problem.
She noted however that despite the fact that the NPL ratio remains at high levels, “signs for the improvement of the situation through restructuring has begun to emerge.”
Georgadji pointed out that loan restructuring reached EUR 4.7 billion in November 2015, adding that restructuring started to pick up pace as both lenders and borrowers familiarise themselves with the relevant procedures and the new insolvency framework.
The Central Bank Governor pointed out the CBC has set new targets to the commercial banks for the first quarter of 2016, amounting to EUR 1 bln in proposed and viable restructuring solutions and an additional EUR 1 bln in agreed restructuring.
She dismissed suggestions that the banks are operating as asset management companies rather than banks, pointing out that in 2015 banks provided new credit amounting to EUR 1.7 bln, of which EUR 1.2 bln in corporate loans and EUR 0.5 bln to households “which is a respectable amount considering the size of Cyprus.”
She reiterated that preliminary studies by the Central Bank have shown that 10-20% of household NPLs are attributed to strategic defaulters, borrowers who opted not to repay their loans although they have the capacity to do so.
As regards restructuring the central bank, Georgadji said the CBC board approved a study carried out by Roland Berger consultants focusing on three pillars: the organic structure, the internal processes and standardised practices, as well as issues of human resources and governance.
The new structure should be implemented by the end of 2016.
