The net demand for loans from businesses in Cyprus decreased in the third quarter of 2022, and banks anticipate a similar decline in the net demand for loans from businesses and households in all loan categories in the fourth quarter of 2022 compared to the third quarter.
According to a Central Bank of Cyprus report, net loan demand from businesses in Cyprus fell further in the third quarter of 2022, contrary to expectations in the previous quarter's Survey for unchanged demand. Despite increased demand for loans for inventories and working capital, the net decrease in business loan demand in Q3 2022 may reflect increased financing needs due to increases in energy and raw material prices, as well as supply chain disruptions. According to the Survey, the net decline in business loan demand in the third quarter of 2022 was driven by lower demand for fixed investment financing, current interest rate levels, lower demand for financing mergers and acquisitions and business restructuring, and lower demand for debt restructuring (part of "other financing needs"). Increasing uncertainty about the economy's future prospects, combined with rising interest rates, appears to be causing firms to postpone investment decisions. SMEs and large firms drove the decline in net loan demand in the third quarter of 2022.
The fourth quarter of 2022 is anticipated to see a decrease in net loan demand from businesses and households across all loan categories, according to the expectations of the banks surveyed.
Stricter criteria and requirements
Banks anticipate that loan requirements in Cyprus will tighten in the fourth quarter of 2022 for all types of consumer loans and, to a greater extent, for business loans.
The third quarter of 2022 saw tighter lending standards than the second, for both loans to businesses and all types of loans to households, according to the survey. The adoption of stricter lending standards was motivated by banks' reduced risk appetite for business loans as well as their perception of increased risk. The general economic situation and outlook, borrower creditworthiness, the state of the housing market, and the collateral needed for business loans were all factors that banks perceived as being riskier. Banks anticipate even stricter lending standards in Cyprus for all loan types in the fourth quarter of 2022, possibly as a result of the anticipated slowdown in economic activity brought on by the negative economic effects of geopolitical developments as well as the negative effects of escalating inflationary pressures on both consumer spending and corporate profits. The sustainability of new lending appears to be the goal of banks' tighter lending policies in the context of increased economic uncertainty and higher interest rates.
The overall terms and conditions for granting loans or credit limits to businesses tightened in the third quarter of 2022. Banks' margins (spreads against a relative benchmark interest rate) for higher-risk loans, collateral requirements, and other terms and conditions such as covenants and loan maturities, in particular, became tighter. According to the Survey, this development reflects banks' increased risk perception and reduced risk tolerance. The overall terms and conditions of household loans (mortgage, consumer, and other loans) became more stringent during the quarter under review. The banks' margins for ordinary loans and higher-risk loans were both affected by the tightening (margin increase). Other restrictions pertaining to the loan's size were also mentioned. Banks cited the assessment of increased risk and their reduced risk tolerance as the reason for the tightening in this category of loans as well.
[This article was translated from its Greek original]