Loan demand in Cyprus falls, interest rates rise

The Cypriot banking institutions are holding a small basket for demand in new loans. Despite the fact that in the first quarter, at least the two major banks showed very good performance, they are prepared to face reduced demand in the coming quarters. According to the new research on bank lending by the Central Bank of Cyprus for the first quarter of 2023, the tightening of loan granting criteria to businesses continues, while the loan granting criteria to households remained unchanged at the already strict levels of the previous quarter. Meanwhile, as noted in the quarterly report by the Central Bank, for the second quarter of 2023, banks expect stricter loan granting criteria and further reduction in loan demand in Cyprus, both for business loans and all categories of loans to households.

At the same time, the decrease in loan demand continues for all categories, partly due to high interest rates. "From the loan supply perspective, banks believe that there is macroeconomic uncertainty," it comments. Therefore, in combination with recent increases in lending rates and negative impacts on households' disposable income and operating costs of businesses, banks remain particularly cautious in order to safeguard the borrower's repayment capacity and maintain the quality of their portfolios.

The reduction in demand for business loans was influenced by higher interest rates and reduced demand for financing fixed investments, mergers and acquisitions, and restructuring.

Specifically, according to the research by the Central Bank, during the first quarter of 2023, the criteria for granting loans to businesses became stricter for the fourth consecutive quarter. "Banks' perception of increased credit risk associated with the state and prospects of the economy, as well as specific sectors or companies, and their reduced tolerance for risk, continue to contribute to the tightening of their criteria for granting business loans," it explains. During the same quarter, the criteria for granting loans to households, for all categories of loans, remained unchanged at the strict levels reached in the previous quarter, while the risk perception regarding the general economic situation and its prospects increased.

As emphasized by the Central Bank, during the first quarter of 2023, the overall terms and conditions for granting new loans or credit limits to businesses became stricter. "Tightening was mentioned in the clauses and duration of new business loans. Although the banks' margin for regular loans (spread over the reference interest rate) decreased on a net basis, there were different opinions among banks. Just as with the criteria for granting these loans, the tightening in the overall terms and conditions for granting business loans reflects the banks' perception of increased risk and their reduced risk tolerance, with increased competition from other banking institutions restraining the tightening of overall terms and conditions," it points out.

During the same quarter, the overall terms and conditions for granting loans to households, both for housing and consumer loans, also became stricter. Specifically, concerning housing loans, the banks' margin for higher-risk loans (spread over the reference interest rate) increased due to higher risk perceptions, while the other terms and conditions remained neutral. Similarly, the tightening of the overall terms and conditions for granting consumer and other loans to households affected both the banks' margin for regular loans and higher-risk loans (increase in margin) due to the increased risk perception by the banks, as well as the reduced pressure from competition.

From the demand side, during the first quarter of 2023, the net demand for loans in Cyprus from businesses and households, for consumer and other loans, and especially for housing loans, continued to decline. The decrease in net demand for business loans was influenced, according to the research, by higher interest rates and reduced demand for financing fixed investments, mergers/acquisitions, and business restructuring. On the other hand, the demand for financing working capital and stock movements continued to increase during this quarter, possibly due to the high cost of production and operation for businesses. As for households, the net decrease in demand for housing loans is attributed, by the banks, to higher interest rates, deteriorating consumer confidence, and less favorable estimated prospects for the housing market. Similarly, the decrease in demand for consumer and other loans is also attributed, according to the research, to higher interest rates, reduced consumer confidence, and reduced spending on durable goods.

Finally, despite the further tightening of criteria for granting business loans, the ratio of rejected applications (official and unofficial) remained unchanged during the first quarter of 2023 for both small and medium-sized enterprises and large enterprises. On the contrary, during this quarter, the ratio of rejected applications for new loans to households continued to increase for the third consecutive quarter, for all categories of loans. "The increase, despite the reduced demand for these loans, is in line with the introduction of stricter criteria for granting loans to households in the previous quarters. In general, stricter loan granting criteria increase the likelihood of banks rejecting loan applications," it concludes.

[This article was translated from its Greek original]