News Column

Why the definition of NPLs in Cyprus is discriminatory

May 6, 2014

By Antonis Hadjichristodoulou

BASED on our research, the swelling of non-performing loans (NPLs) in Cyprus in the past 12 months is largely due to the sudden change of the definition of NPLs by the Central Bank of Cyprus (CBC) in mid-2013.

The new definition by the troika is very strict compared, not only to all other bailed-out southern EU countries, but to economically advanced EU nations as well We could not therefore agree more with BoC's CEO John Hourican who recently described the new CBC definition as "foolish".

NPLs in the island can only decrease to more acceptable levels and ratios if, together with the other measures currently being discussed such as proper restructuring, lowering of lending interest rates, and pressing those who can pay etc, the NPL definition in Cyprus is made milder, at least temporarily for the next two crucial years of the Cyprus economy and its banking system.

The troika has no excuse whatsoever to reject such a change in the NPL definition if it's well justified and documented by the Cypriot authorities.

After all, the troika has tolerated relative relaxations in other bailed-out EU countries. If the definition of NPLs in Cyprus remains unchanged, the recession in the island will certainly be prolonged because the current definition traps, unnecessarily, excessive amounts of capital for the local banks/co-ops which are therefore unable to finance the long-awaited growth and development of the local economy.

Comparison of NPLs definition applying in Cyprus since mid-2013 with the definition applying in several other EU countries.

(a) As far as the basic NPL criterion is concerned (arrears in excess of 90 days irrespective of collateral), the Cypriot banks/co-ops are since mid-2013 on the same footing as their European counterparts, with the exception of banks in Greece where a housing loan becomes an NPL only after six months arrears as against only three months in Cyprus and other EU countries.

(b) In addition to the above basic criterion, there are in place some additional rules in the EU for classifying a loan as NPL. While all these additional rules are currently being applied strictly by Cypriot banks/co-ops this is not so in a number of EU countries. The troika and/or the European Central Bank are tolerating relaxations in other EU countries, as the following striking instances indicate:

In Greece, Austria and Germany, restructured loans are no longer considered as NPLs, provided of course that the new repayment programme, which might provide for grace period and/or the payment of interest only for an agreed period of time, is subsequently being observed by the customer. In Cyprus however a bank loan which is restructured even with 60 days arrears has to stay in the category of NPLs for a minimum period of six months.

While in Portugal only the loan amounts in arrears count as NPLs, in Cyprus the entire balance of the loan of an individual or a business with arrears over three months is characterised as NPL.

For example, a housing loan of 400,000 has arrears amounting to 8,000 over three months. A Portuguese commercial bank will present in its books an amount of only 8,000 as the NPL, whereas a bank/co-op in Cyprus must characterise the entire loan, 400,000, as an NPL.

In Cyprus, banks/co-ops apply the customer cover rule as against the account cover rule applying in other EU countries. Based on the much stricter customer cover rule, if the percentage amount of the non-performing loan of the customer to his/hers total loans exceeds 20 per cent, then all of the customer's loans are characterised as NPLs. Based on the account cover rule however only the specific loan in arrears over three months is considered as an NPL.

Again, for example, a customer has four loans of 250,000 each. Only one loan is problematic, with arrears over three months, amounting to 50,000. In most EU countries this customer's NPLs would amount to 250,000 balance of problematic loan. In Portugal only an amount of 50,000 would be considered as non-performing.

But in Cyprus however ,based on the customer's cover rule, his or her NPL would amount to 1 million as the amount of the problematic loan, 250,000, is higher than 20 per cent of the customers total loans of 1 million.

Finally, we could not agree more with CBC's Directive that new loans should be granted by banks/co-ops only to customers with repayment ability and not to those who can offer satisfactory collateral, irrespective of their cash-flow.

However, when the restructuring of an existing unsecured customer loan takes place in Portugal and Spain and the bank involved improves its position by strengthening significantly its tangible collateral as part of the restructuring agreement, then the loan can be classified as performing after being restructured. No such relaxation exists for Cyprus.

Antonis Hadjichristodoulou is a holder of a B.Sc (Econ) degree from the London School of Economics and an MBA degree from Cass Business School City Uni London. He has worked for about 35 years in two banks in Cyprus in their credit risk departments. Currently he is a visiting Lecturer at CIIM (Finance and Banking) and Consultant at Grantxpert Consulting Ltd.

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Source: Cyprus Mail

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