Cyprus Central Bank governor Constantinos Herodotou has warned Cypriot banks not to utilise their excessive liquidity by rushing to grant loans without properly scrutinising the borrower’s repayment capacity.
Herodotou said banks need to remain cautious even though they are sitting on “piles of liquidity.”
“There is no liquidity issue with any bank in Cyprus, but at the same time there should be no rush in giving out loans, we should not repeat the mistakes of the past.
Yes, there is excess liquidity, our banks are facing two challenges, one is NPLs the second is profitability, but we should not allow the banks to rush to give out loans.”
Herodotou advised banks to evaluate the risk of the loan, the capability of repayment and only when those loans have a sound business case and a sound repayment case then the banks should give out the loans deemed good for their balance sheet.
“And if the banks overdo it then it’s the job of the regulator to change the regulatory requirements either because the banks are overdoing it or because we see as the Central Bank that certain sectors are overinflating, in order to avoid another curse of going from bubble to bubble, we need to start preventing the bubbles from being created.”
Speaking to a lunch hosted by the Nicosia rotary club, Herodotou said the Cypriot banking system has recorded “immense progress” by reducing its stock of NPLs from their peak of €28 bln to the current level of €9.5 bln, a reduction of 68%.
With the current NPL level is at 32% of total loans, Herodotou said Cypriot banks need to do more in converging with the 10% which is the threshold set by the Single Supervisory Mechanism and the 3% NPL rate which is the current NPL average in the EU.
He assured the SSM does not expect the Cyprus NPL rate to drop from 30% to 10% in a year but noted that “they want to see a credible path of sufficient progress so that within a reasonable amount of years you will approach that 10% threshold.”
“I think our big banks have been demonstrating that recently and that is very pleasing, but I think we need to encourage the smaller banks to do so because now they can see what has worked for the bigger banks,” the CBC governor said.
Noting it is “absolutely normal and expected” for bigger banks to lead the way in NPL reduction, Herodotou said that smaller banks need to plan NPL reduction through their business model.
“But they need to prioritise this, and I repeat the path has been shown by the biggest banks,” he added.
Smaller banks are directly supervised by the CBC and not by the Single Supervisory Mechanism.
Herodotou highlighted the majority of NPLs reduction has been achieved through the sale of loans offloaded to credit acquiring companies (CACs).
“We should never forget that they stay within the economy, so our households, small and medium-sized companies and big enterprises continue to have those NPLs.”
But he added that the positive effect of loan sales is that it “stabilises further the banking sector as it gives more ability to the management of banks to focus on the actual business of doing banking.” (source CNA)
