12° Nicosia,
24 July, 2024

Borrowers in a high-stakes game of loan roulette

The financial strategies of borrowers amidst rising rates

Panayiotis Rougalas

Panayiotis Rougalas

In 2023, borrowers face a pivotal year, primarily due to the soaring levels of inflation, rising prices, and increasing interest rates. This year also carries significant importance for banks, not in terms of profits, as they have been prosperous since 2022, but rather in the context of their customer base, where the "cards are being shuffled once again." Banks have adopted a strategy of luring customers by offering them interest rates lower than those provided by their competitors. Instead of opting for loan restructuring or renegotiating terms with their existing banks, borrowers are now turning to banks of their choice with the intention of transferring their loans. This practice has become increasingly prevalent in recent months.

As of July 2022, borrowers have witnessed the European Central Bank's total intervention in interest rates, amounting to 450 basis points. This means that, for loans tied to interest rates of the affected type (such as Euribor), an additional 4.5% has been imposed on top of the contracted interest rate.

This marks the second occasion, following the onset of the pandemic in 2020, when banks have adopted this approach, targeting customers they consider worthy of inclusion in their clientele. In 2020, banks observed customer behavior during the moratorium on loan installments, a period in which customers, even in the midst of a pandemic, demonstrated punctual repayment. Banks took note of these punctual customers.

Instead of pursuing loan restructuring or renegotiation, borrowers are now exploring the option of transferring their loans to other banking institutions.

Today, some customers are actively seeking alternative banks that, in their assessment, offer more favorable terms. It's important to note that requesting a loan transfer to another bank does not guarantee automatic acceptance by the receiving bank. Each bank evaluates the applicant's data and competes to win over customers by tailoring interest rates to the unique profile of each borrower.

The Trend of Loan Transfers

The propensity to transfer loans from one bank to another is substantiated by data from the Central Bank of Cyprus, indicating a decline in loan restructurings since the fourth quarter of 2022, with a decrease of approximately €300 million compared to the first quarter. This decrease is attributed to the fact that when a borrower's troubled loan is internally restructured by the current bank, it is categorized as a restructuring. However, if the borrower switches banks and transfers the loan, it is considered a new loan. Data provided to Parliament by the Central Bank of Cyprus based on quarterly updates reveals that restructurings in the first quarter of 2023 decreased to €1.9 billion from €2.2 billion in the fourth quarter of 2022. These restructurings encompass both mortgage and business loans, with business loans dominating the figures.

Breaking down the data, banks restructured household loans amounting to €523 million and business loans totaling €1.3 billion in the first quarter of 2023. Examining data from individual banking institutions, the Bank of Cyprus restructured €921 million of loans in the first quarter of 2023, down from €1.1 billion in the previous quarter of 2022. Hellenic Bank conducted loan restructurings totaling €393 million, compared to €418 million in Q4 2022. Alpha Bank Cyprus recorded loan restructurings of €162 million in Q1 2023, down from €170 million in Q4 2022. Astrobank restructured loans worth €142 million in Q1 2023, compared to €137 million in Q4 2022. Eurobank Cyprus oversaw restructurings of €136 million in Q1 2023, slightly higher than the €129 million restructured in Q4 2022. CDB Bank maintained its loan restructurings at €64 million in Q1 of this year, mirroring its Q4 2022 figures. Finally, at the Housing Finance Agency (HFA), restructurings for the first quarter amounted to €56 million, down from €59.5 million in the fourth quarter of 2022.

Increasing Amounts

The recent changes in interest rates have had significant implications across various financial products. In July 2023, the interest rate on time deposits up to one year for households dropped to 0.87%, a notable decrease from the 1.21% recorded in June. Similarly, the interest rate for deposits from non-financial companies declined to 1.68% in July, down from 1.86% in June 2023.

Conversely, the interest rate on consumer loans saw an uptick, rising to 5.51% in July 2023, compared to 5.23% in the previous month. For those seeking home purchase loans, the interest rate climbed to 4.50%, marking an increase from the 4.19% rate in June 2023. Loans to non-financial companies, specifically for amounts up to EUR 1 million, witnessed a surge in interest rates, reaching 5.65% in July, up from 5.17% in June 2023. Finally, loans to non-financial companies with amounts exceeding EUR 1 million experienced a similar trend, with the interest rate rising to 6.33%, compared to 5.87% in June.

These fluctuations in interest rates can be attributed to the 10 successive hikes by the European Central Bank (ECB). Consequently, the base rate now stands at 4.5%, up from the previous 4.25%, while the deposit rate has increased to 4% from 3.75%, and the marginal lending rate has reached 4.75%, a rise from the previous 4.5%. These adjustments reflect the ongoing challenges and changes in the financial landscape, further emphasizing the significance of borrowers' decisions in this dynamic economic environment.

[This article was translated from its Greek original]

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