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16 June, 2024
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MPs move forward with divestment changes

Central Bank stresses need for stable legal framework in divestments

Panayiotis Rougalas

Panayiotis Rougalas

MPs are displaying a resolute determination to press ahead with crucial changes to the divestment framework before the parliamentary summer recess. As the summer unfolds, an atmosphere of divestment permeates, driven by the unwavering commitment of Members of Parliament. Unsurprisingly, the banking sector has not remained silent, actively voicing concerns over proposed amendments that may potentially undermine the economy. During the annual general meeting of the Cyprus Banks Association in 2023, prominent figures such as Constantinos Herodotou, the Governor of the Central Bank of Cyprus, and Constantinos Koutentakis, the outgoing Chairman of the Association of Cyprus Banks and CEO of Alpha Bank Cyprus, emphasized the vital importance of establishing a stable legal framework to safeguard financial stability.

Governor Herodotou asserted that reverting to previous practices is not a viable option in light of ongoing developments and discussions. He underscored that the tool of divestments serves as a means to exert pressure, ensuring that creditors and borrowers engage in sustainable restructuring. Furthermore, he emphasized the Central Bank's readiness to engage with institutions and authorities to address any identified weaknesses, citing their support for legislative proposals that align with the desired direction. Noteworthy examples included proposals for enhanced transparency in the transmission of the "Letter Th" and the utilization of the current market value of properties as the exchange price in voluntary property exchange processes. Governor Herodotou also provided statistical insights, highlighting a significant reduction in non-performing loans (NPLs) across the banking sector, albeit with a remaining level of 9.5% at the close of 2022, surpassing the EU average of 1.8%. He further acknowledged that progress has predominantly occurred in larger banks, while NPLs in small and medium-sized banks stood at 25.4% by the end of 2022.

Taking up the mantle of Chairman of the Association of Cyprus Banks, Mr. Koutentakis echoed the sentiment that ongoing discussions surrounding the operational framework of banks, particularly NPL management, constitute an integral part of the Association's agenda. Koutentakis expressed concerns regarding frequent legislative interventions in the divestment legal framework, arguing that these actions not only prolong the NPL issue but also burden the prospects of the Cypriot economy, international ratings, and the overall creditworthiness of Cyprus, ultimately affecting its citizens. He reaffirmed the banking sector's commitment to excellence across all aspects of economic activity, striving to create conditions conducive to sustainable growth, foreign investment, quality employment, and social well-being.

Moreover, Koutentakis stressed the necessity of implementing mechanisms that effectively address strategic defaulters while advocating for social measures that benefit those genuinely in need. He underscored the sector's emphasis on reducing NPLs and enhancing portfolio quality through comprehensive viability assessments for new loans. Although progress has been made, with NPLs decreasing to 10%, this figure remains significantly higher than the European average of below 2%, illustrating the ongoing challenge faced by Cyprus.

A day prior to these discussions, George Pantelis, the Director General of the Finance Ministry, emphasized that the existing NPLs primarily stem from cases of strategic defaulters with loans spanning over two decades. Pantelis clarified that while borrowers have the right to seek legal recourse, the state remains committed to supporting vulnerable groups. However, he cautioned against providing a safety net to strategic defaulters, as it would burden the state, responsible borrowers, and taxpayers. Pantelis highlighted that ongoing discussions are worrisome to rating agencies and shared the alarming figure of 25 billion euros, representing the total NPLs within the Cypriot economy, encompassing both banks and credit purchase companies.

Regarding the latest data, by the end of March 2023, the total NPLs in banks had decreased by 4.6% to reach 2.2 billion euros compared to the previous quarter. Concurrently, the total loans increased marginally by 0.3% to 24.4 billion euros. The ratio of NPLs to total loans decreased from 9.5% in December 2022 to 9% in March 2023, and the provisioning coverage ratio of NPLs stood at 48.8% by the end of March 2023, up from 47.5% in December 2022. Overall, licensed credit institutions witnessed a substantial reduction of 89.3% (equivalent to 18.4 billion euros) in NPLs from the beginning of 2018 to March 2023, primarily driven by the sale of loans to credit acquisition companies.

[This article was translated from its Greek original]

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