Finance Minister Makis Keravnos has told Cyprus banks to lower their interest rates on loans in a bid to get ahead of a possible new toxic loan crisis for the banking sector, driven by rising borrowing rates.
Keravnos told MPs at the House Finance Committee on Monday that he has written to the Cypriot banks urging them to cut interest rates on housing loans, bring down bank charges and increase rates on deposits.
He also asked the banks to prepare lists of loans issued to strategic defaulters.
He added that the finance ministry and the Central Bank of Cyprus have called on local banking institutions to take pre-emptive measures.
Keravnos said that, just like the Governor of the Central Bank, Constantinos Herodotou, he too has urged banks to manage customer loans which are on the verge of becoming a non-performing loan (NPL), as effectively as possible, with sustainable restructuring where needed.
The ministry is also mulling ways to increase the monitoring powers of the Financial Commissioner.
Welcoming a recent House decision not to renew a freeze on foreclosures, the minister said that while foreclosures should be a pressure tool on strategic defaulters, banks and credit acquiring companies should act responsibly.
“We are not begging the banks and credit acquiring companies, but we are making suggestions, and we deem it necessary we will proceed with legislative amendments,” said Keravnos.
The Finance Minister said 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, as long as 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.
With its latest intervention on March 16, the European Central Bank raised interest rates for the sixth time since last July, up by 0.5% to 3.5%, with markets now expecting further hikes of 75 bps before the end of summer.
Monthly mortgage instalment
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%.
Thus, if someone had taken out a loan of €200,000 last summer with a repayment period of 20 years, their instalment would have been €1,060.
However, since the ECB has increased rates, mortgage rates in Cyprus are now close to 6%.
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.
When it comes to deposit rates, Cypriots banks offer the lowest rates in the Eurozone.
Following ECB’s latest 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 ECB data 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%.