Cyprus banks appear unable to give out loans despite improved macroeconomic indicators and low-interest rates on offer with bankers refuting claims they are purposely avoiding injecting money back into the economy.
Arguing that they are doing their best to execute their role of fuelling the economy with new loans, bankers say there aren’t enough viable big projects to invest in.
Banks are keeping a tight lid on loans given out to consumers and businesses as credit expansion in 2019 is restricted to a single figure percentage, despite the high liquidity in their coffers.
According to the Central Bank of Cyprus data, new loans granted by banks were down to €2.7 bln in October, up by just a 5.3% year-on-year.
Banks have surplus liquidity of €14 bln, as packaging and selling off loans along with write-offs, coupled with changes brought about with the collapse of the Co-op Bank, have significantly reduced their lending balances as customer deposits increase.
Despite the high liquidity available, banks are not lending out significantly more loans, arguing that they find it difficult to find viable borrowers, as about half of individuals and many businesses already have non-performing loans.
As a result, some of the major banks are planning to invest their excess liquidity in non-Cyprus investments to avoid the penalty imposed by the European Central Bank on deposits that Cypriot banks “park” in Frankfurt.
Bank of Cyprus Financial Research Director Ioannis Tirkides argues that despite appearances banks have been doing their best to fuel the economy with funds.
New lending by banks has exceeded €3 bln or 15% of GDP in recent years. Amounts have been declining because of deleveraging in turn driven by restructurings of non-performing loans and substantial repayments.
“While banks are still curtailed in their lending because of balance sheet concerns, the economy has been supplied with adequate financing to support growth. It was not a credit-less recovery after all but there was no excessive lending either,” Tirkides told the Financial Mirror.
Money too tight to mention
He said that there aren’t many viable large projects eligible for financing from local banks, putting them in a tight spot as they are looking for ventures to finance.
In earlier previous comments, Andreas Assiotis, head of Hellenic Bank’s Economic Research Department, agreed that banks are holding a tighter leash on loans after the 2013 financial crisis, but that does not mean that they are not looking to finance sustainable projects.
“Banks granting unsecured loans is seen as one of the key factors of the crisis that decimated the banking system.”
Assiotis said banks are trying to increase lending in parallel with the nominal growth of the relative industry and the overall economy, stressing that the economy is in motion once more due to lending from banking institutions.
“That is why we are looking to invest in income-generating projects while diversifying our portfolio. One of the principles banks are following is to have a diversified portfolio, so as not to be exposed in case of a mishap in one sector.
We want to hedge the risk by putting our eggs in many baskets.” Said Assiotis.
Critical of the banks, Independent Movement MP Anna Theologou said the practice followed by Cyprus banks is to sell off loans and keep the money in their coffers, rather than investing it back into the economy.
“A bank’s profitability is based on its ability to give out loans, however, they cannot give out loans due to high private debt, which is partially created by high-interest rates given by banks, ignoring the instructions of the ECB to keep interest rates on lending low.”
“Instead, Cyprus banks went ahead and did what they thought best, giving out loans with high-interest rates,” argued Theologou.
She said not granting loans would only spell more problems for the future as money will not be circulating in the economy.
“I foresee that there will come a time when banks will be forced to give out loans on a mass scale, begging people to take out loans as they did in the past.”
Total loans by banks to households and businesses, excluding restructuring, stood at €2.68 bln in October from €2.54 bln in the same period last year, recording a relatively small increase of 5.3%.
New business loans are up 5.6%. They rose to €1.65 bln from €1.56 bln, figures revealing a diminished interest from businesses for new ventures.
New loans to households rose by just 4.8% to €1.03 bln from €984 mln, despite the extremely low-interest rates on mortgages and consumer loans.
A crunch on new lending is observed at a time when lending rates are at historically low levels.
The interest rate on loans for home purchase fell to 2.08%, from 2.13% in the previous month.
The interest rate on loans to non-financial corporations for amounts up to €1 mln recorded a significant decrease to 3.08%, from 3.37% in September.
October interest rates on loans to non-financial corporations for amounts over €1 mln declined significantly to 3.01%, compared to 3.37% the previous month.
The interest rate on one-year term deposits for households decreased to 0.12%, from 0.16%.
The corresponding interest rate on deposits from non-financial corporations rose to 0.31%, compared to 0.13% in September.
