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Tighter lending meets lower loan demand

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During the second quarter of 2023, the lending criteria for businesses and households remained strict, indicating the caution of banks.

At the same time, there was a decrease in loan demand, attributed to high interest rates and reduced consumer confidence.

The Central Bank’s (CBC) Bank Lending Survey for Q2 2023 shows loan demand decreased across all categories, primarily due to high interest rates and decreased demand for financing fixed investments and durable consumer goods.

Lending criteria for both businesses and all household loan categories remained unchanged at the strict levels of the previous quarter.

In the context of prevailing economic and financial conditions, banks seem to be cautious in extending new loans to maintain a low probability of non-performing loans.

But they pursue sustainable loan renegotiations where necessary.

The dual approach of banks aims to mitigate risks and ensure the quality of their loan portfolios.

In Q2 2023, the overall terms and conditions for granting new loans or credit limits to businesses became stricter, mainly due to increased banks’ margins for higher-risk loans.

On the contrary, banks’ margins for ordinary loans decreased on a net basis, although there were differing opinions.

Increased competition from other banking institutions restrained the tightening of overall terms and conditions for granting new business loans, while the remaining factors had a neutral impact, with banks’ responses offsetting each other.

Overall terms and conditions for granting new mortgages remained unchanged on a net basis despite the net decrease in banks’ margins for ordinary loans.

Reduced loan demand

From the demand perspective, during Q2 2023, net loan demand in Cyprus from businesses and households for mortgages, consumer loans and other loans continued to decrease.

According to the survey, the decrease in net demand for business loans can be attributed to higher interest rates and reduced demand for financing fixed investments, although to a lesser extent than in the previous quarter.

Demand for working capital and inventory financing continued to increase during Q2, possibly due to high energy prices and the high cost of raw materials/products.

Net demand for housing loans decreased during Q2 2023, albeit to a lesser extent than in the previous five quarters.

Banks attribute this decrease to high interest rates and worsening consumer confidence.

Expectations

For Q3 2023, banks expect the lending criteria for business loans to remain unchanged compared to the previous quarter.

However, stricter lending criteria are expected for all household loan categories, indicating that the moderation in new lending may continue.

In parallel, net loan demand in Cyprus is expected, according to the survey, to decrease further, both from businesses and for all household loan categories.

The CBC said the survey results reflect the perceptions and expectations of participating banks and do not necessarily reflect the views, expectations, or estimates of the Central Bank.