As of December 2015, non-performing loans (NPLs) amounted to €27.8 billion, which is equivalent to a NPL ratio of 49.3% and a NPL coverage ratio of 37.2%. Growing stocks of real estate assets owned by banks are expected to add to the level of complexity and risks to be managed by banks.
Cyprus exited the Extended Fund Facility (EFF) with the IMF in March 2016 and had taken a number of measures to facilitate NPL resolution and to support the clean-up of banks’ balance sheets under that programme. Specifically:
the law allowing loan sales by banks was approved;
the corporate and personal insolvency frameworks were reformed;
an arrears-management framework was published;
the code of conduct and the directive amending the definition of NPLs reflect EBA standards.
A conference in February organised jointly by the Ministry of Finance, Chamber of Commerce and EIB reviewed progress (see below).
Highlights on NPLs (click to enlarge)
Assessment of NPL Burden and Corporate Debt Distress
IMF, Statement on Cyprus programme completion, 7 March 2016
Cyprus has become the latest Eurozone state to exit an IMF rescue programme. Cyprus is leaving the so-called Extended Fund Facility (EFF) arrangement with immediate effect and two months before the loans expires.
‘’The banking system is on a much more solid footing and workouts of NPLs are accelerating, opening space for new productive lending.’’
National Bank of Cyprus, Financial Stability Report 2015, September 2015
The overall level of NPLs remains very high. A large portion of impaired loans are to the real estate sector to which banks are highly exposed and a significant amount of impaired loans arises in the non-mortgage loan book. While bank deposit outflows have slowed, NPLs have continued to rise, and credit remains impaired.
A key priority on the reform agenda has been addressing the high level of NPLs in the banking system and policy action has been taken to deal with this. The high level of NPLs reflects the severe recession. It also reflects the increasing number of strategic defaults according to anecdotal evidence from banks, especially given the positive asset position of households. However, latest available data indicate that NPLs may be reaching their peak.
National reforms and support by the international organisations
EBRD, Strategy for Cyprus, May 2015
EBRD’s current strategy in Cyprus is to support for financial sector restructuring to increase resilience, restore confidence and improve corporate governance. In terms of NPLs, the EBRD plans may for example consider co-financing / co-investment in property portfolios or equity investment in distressed property funds in order to stimulate liquidity in the property market which will ultimately assist banks to reduce their property-related NPLs.
International Monetary Fund, 9th Review of Cyprus EFF, January 2016
From the press release: Addressing banks’ high NPLs remains essential to revive lending and raise economic growth prospects. With the recent approval of a law allowing banks to sell their loans, the infrastructure to clean-up banks’ balance sheets has now been largely put in place. Banks have set up internal loan restructuring operations and are refining policies and practices on the basis of experience to date. The legal frameworks for foreclosure and insolvency, along with the relevant institutions and processes, have been established, and these are starting to operate. The Central Bank of Cyprus (CBC), in its financial stability function, is taking an increasingly active role in encouraging and monitoring progress with reducing NPLs. Yet, the NPL ratio remains stubbornly high, and efforts should focus on utilising the tools at hand.
National Bank of Cyprus, Financial Stability Report 2015, September 2015
A key priority on the reform agenda has been addressing the high level of non-performing loans in the banking system and policy action has been taken to deal with this. Below are examples of recent policy developments to tackle NPLs:
The new package of insolvency laws has been designed to help borrowers restructure their debt and should make it easier for banks to demand payment or seize assets. A debt-restructuring framework has been put in place, banks have put in place restructuring units, legislation to facilitate foreclosures was adopted in April 2015 and this has been complemented by a new modernised insolvency regime. More time is required to make a proper assessment as to whether there has been an improvement in the restructuring process due to the new legislation, however, the situation is being monitored. Implementing the measures effectively is a necessary condition for a sustainable stabilisation of the banking system.
The Central Bank of Cyprus (CBC) published an arrears-management framework (AMF) and the Code of Conduct in April 2015 to guide the loan restructuring process and developed a supervisory framework to monitor banks’ capacity and progress against operational and restructuring indicators. The AMF requires banks to implement efficient and effective structures, processes and tools to support arrears management and execute fair, adequate and sustainable debt restructurings. Incentives are now in place for banks to handle the excessive NPLs. Through this process, the pace of debt restructuring is expected to pick up.
The definition of NPLs was amended through the issuance of the Directive on the Definitions of Non-Performing and Restructured Credit Facilities, 2013, to reflect international practices such that any loan that is in arrears for more than 90 days is considered as non-performing, irrespective of the value of the underlying collateral.
Loan provisioning and impairment practices are regulated through the Directive on the Loan Impairment and Provisioning Practices, 2014-2015, that sets out the procedures to be followed in the identification, assessment and measurement of loan impairments and the disclosure requirements of policies, valuation methods and analysis of the loan portfolio. The directive aims at ensuring prudent application of the relevant IFRS in this area and that credit facilities requiring provisions, as indicated by the existence of a trigger event of impairment, are correctly and timely identified and adequate provisions are recognised, either on an individual or collective basis.
Seminar on “Solving NPLs Through Innovative Solutions”, 5 February 2016
Cooperation between the Ministry of Finance of Cyprus, the Cyprus Chamber of Commerce and Industry (CCCI) and the European Investment Bank Group (EIB Group). Over 250 local and international industry participants attended the seminar including policy makers, representatives of the banking sector and private sector actors. The aim was to highlight the key impediments to resolving the issue of NPLs in Cyprus whilst sharing best practices from other European countries and developing comprehensive proposals for policy reforms and initiatives.
The Cypriot NPL Regulatory Environment: recently reformed, yet largely untested
KPMG, 9 May 2017
In the past couple years, Cypriot authorities have designed significant reforms to create an environment conducive to NPL resolution, and while the new framework meets a number of benchmarks relative to other EU distressed markets, it is still largely untested
The Central Bank of Cyprus announces the publication of the Directive on Arrears Management of 2015 in the Official Gazette of the Republic dated 03/04/2015 (O.G. Third Annex (I) R.A.A. 107/2015, No. 4862).