31.08.2022
The latest Financial Stability Report published by the Central Bank of Cyprus (CBC) states that “credit acquiring companies (CACs) should have the tools available to lending institutions in order to be able to provide fast, efficient and viable solutions to their borrowers and/or proceed to the recovery of the principal bond under certain circumstances”.
CACs must also be prepared to recommend fair restructuring solutions that do not hurt either the borrowers or the CACs themselves. Unfortunately, some companies that have recently entered the NPL market in Cyprus do not apply such “fair” methods as they seem to recommend solutions that worsen the financial situation of both the borrower and the CAC. These decisions are the result of staff errors/mistakes and/or lack of proper analysis of the borrower’s case to understand the dynamics and time horizon of recovery.
The report released by the Central Bank of Cyprus also states that “the use of methods such as the sale of CAC loans in an attempt to solve the problem of non-performing loans (NPL) contributed to the cleanup of the balance sheets of lending institutions. However, these loans remain part of the private debt of the non-financial sector and therefore a heavy burden on the economy.” Thus, “reducing non-performing loans and properly restructuring loans to make them efficient are big challenges for businesses, households, the banking sector and the economy.”
To highlight the importance of the problem and the need for sustainable solutions, let’s take a look at some of the data mentioned in the report. At the end of 2021, CAC managed 80,192 loans for a total contractual value of €19.2 billion , which is almost equal to the GDP of Cyprus. The value of collateral amounted to 52% of the gross book value, of which 32% related to the primary residence of the borrowers. Looking at this data, we understand that thousands of prime residences are at risk of foreclosure, especially if CACs do not show the good will to find viable solutions. This could justify the recent decision of Parliament to suspend foreclosure on real estate until October (which, by the way, does not solve the existing problem).
Recently, Greece’s finance minister, Christos Staikouras, criticized the country’s commercial banks and CACs for not using out-of-court settlements enough, and demanded more flexibility and better solutions for borrowers. In Cyprus, the Central Bank has often stressed the need to provide solutions – mostly to viable borrowers – without delay or additional fees, following a transparent process and demonstrating good will. CACs should not forget that they now play a vital role in the Cypriot economy as they are called upon to address the most pressing legacy problem of the Cypriot economy, i.e. the private indebtedness of households and businesses.
As noted in the Ministry of Finance Annual Report 2021, “NPLs in relation to total loans remain higher than the European average despite the progress made, and this is still considered one of the banking sector’s biggest challenges . ” along with domestic and business excessive borrowing . The problem affects capitalization, profitability and the future outlook of the economy as a whole.” Just a few days ago, an amendment was made to the CBC Directive on Authorization and Supervision of Loan Acquiring Services, which focused on issues such as organizational structure, distribution of responsibilities, internal controls, effective restructuring of non-performing credit lines, proper monitoring and handling of complaints and, above all, fair treatment of borrowers and data protection. A landmark decision by the CBC that we hope will ensure that the amended directive is passed quickly.
Therefore, the CACs, and especially those that have recently entered the Cypriot market, should start implementing best practices as their goal should not only be to generate profit for their shareholders, but also to contribute to the competitiveness of the Cypriot economy and to help preserve the social fabric.
All comments are the personal opinion of Dr. Mountis and in no way represent the company he works for.
