Banks told deposit rate too low, toxic loans might rise

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The Central Bank is concerned over a possible rise in non-performing loans following a series of increases in interest rates, as it calls on banking institutions to take pre-emptive measures.

Cyprus Central Bank Governor Constantinos Herodotou urged banks to manage customer loans which are on the verge of becoming an NPL, as effectively as possible, with sustainable restructuring where needed.

Herodotou met with bankers on Tuesday with two hot items on his agenda.

He gave clear instructions to banks to address rising interest rates, increasing pressure on households already cornered by the hiking cost of living.

Banks were advised to restructure loans by borrowers in a tight spot while they can still meet instalments rather than wait until they are deemed an NPL.

The governor called for timely measures to prevent harmful impacts on the economy.

Since July, the ECB has raised interest rates by 0.5% to 3.5%, with markets now expecting further hikes of 75 bps before the end of summer.

In real terms, the increase has seen monthly mortgage instalments rise by several hundred euros.

The average mortgage interest rate in July was 2.5%, and the maximum could reach 3%.

So, in the summer, if someone had taken out a loan of €200,000 with a repayment period of 20 years, their instalment would have been €1,060.

However, since the ECB has increased rates, mortgage rates are now 5.5% to 5.75%.

With most housing loans issued with a flexible interest rate regulated by the market, the monthly payment for a €200,000 loan has increased by €345.

Deposit rates

Herodotou advised banks to push up deposit rates, as Cypriots banks offer the lowest rates in the Eurozone.

Following ECB’s decision, the interest on refinancing operations stood at 3.5% and for deposits at 3%.

However, Cyprus banks have been under pressure from EU authorities, as data from the European Central Bank shows they offer their customers the lowest savings rates, with critics going as far as calling them greedy.

The interest rate on deposits of up to one year is around 0.24%.