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COVID19: Central Bank warns of new NPLs cycle

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Commercial banks must properly prepare to address a new cycle of non-performing loans in 2021 created by the coronavirus pandemic, warned Cyprus Central Bank governor Constantinos Herodotou.

He believes that NPLs are expected to rise in 2021, as the debt repayment holiday scheme introduced in mid-March following the Covid-19 outbreak ends in December.

“Rationalisation of bank balance sheets should continue and the rebuilding of the banking system after the pandemic should focus on tackling non-performing debt,” Herodotou told the virtual AGM of the Associations of Cyprus Banks on Wednesday.

He said that apart from low-interest rates hampering Eurozone banks’ profitability, Cypriot banks face the additional challenge of high NPLs, an unwanted legacy of the 2013 financial crisis.

On the debt moratorium, Herodotou stressed that debt repayment suspension is temporary and cannot resolve structural weaknesses.

He argued that a major factor in determining the situation concerning loans that have been offloaded from the banking system is the affected borrower’s capacity to comply with their debt obligations.

“In this context, the Cypriot banks should be ready to face a new cycle of NPLs, provisions and possible losses, a phenomenon observed globally,” Heredotou said.

The Central Bank’s base scenario is a contraction of the Cyprus economy by 7.3% in 2020, due to the pandemic.

“The problems caused to the economy are grave but manageable.”

Finance Minister Constantinos Petrides said that efforts to get rid of the burden of non-performing loans (NPLs) in the banking system should be intensified.

“Achieving this goal will significantly improve the prospects of banks and their ability to finance businesses and households,” Petrides said.

He said that COVID-19 has caused significant changes in economic behaviour that will inevitably have a negative impact on economic activity.

Petrides argued that the government acted in a timely and immediate manner, announcing more than 60 support measures of €1.2 bln.

“The ability of Cypriot banks to offer financing with the lowest lending rates we have ever had is also remarkable, as well as the correct assessment of a borrower’s creditworthiness before any credit facility is granted.”