New loans in Cyprus are being repaid better. Banks are choosing their clients more carefully.

New loans in Cyprus are significantly less likely to default than loans granted just a few years ago. For the most recent financings, the percentage of loans that fall into the default category is only around 0.2–0.4 percent.

This doesn't just mean that residents have become more disciplined debtors. After the banking crisis, financial institutions tightened their rules and are much more thorough in assessing a customer's income, expenses, and ability to make timely payments.

New loans in Cyprus are becoming less and less likely to default

Data published in an analysis by the Central Bank of Cyprus shows what's happening with loans granted since 2017. It doesn't just concern old, unpaid liabilities that banks have been trying to remove from their balance sheets for years.

For loans granted in 2017, the default rate is approximately 3.8 percent. For 2018 financings, it fell to approximately 1.5 percent, while in 2019 it increased to approximately 2.7 percent.

Since 2020, rates have generally remained around 1 percent or below. For the newest loans, they are now only around 0.2–0.4 percent.

What does default actually mean?

The default rate shows what proportion of loans granted during a given period are no longer properly serviced.

A loan may be deemed in default, among other things, if the delinquency in repayment exceeds 90 days. The bank may also determine earlier that the client is unlikely to repay the entire loan without taking additional action, such as seizing collateral.

Therefore, not every delay of several days constitutes a formal default. This is a more serious and precisely defined category used by banks and supervisory authorities.

Banks changed the rules after the crisis

The decline in new problem loans is no accident. After the 2013 crisis, banks were forced to change the way they provided financing.

Currently, they check much more thoroughly, among other things:

• the amount and stability of income,
• the client's existing obligations,
• monthly living costs,
• value and quality of collateral,
• history of repayment of previous loans,
• ability to pay installments following a possible interest rate increase.

This means that loans are more likely to go to individuals and businesses that are more likely to repay them on time. At the same time, some customers who previously could have received financing are now being denied or are only able to borrow a smaller amount.

Low default rates therefore indicate both better repayment performance and a more selective approach by banks.

The pandemic was a serious test

The new lending model was put to an exceptionally difficult test in 2020. At the height of the COVID-19 pandemic, approximately half of the properly serviced loans in the Cypriot banking system were temporarily suspended.

There were concerns that after the end of the bailout programs, banks would be flooded with a new wave of defaults. However, this scenario did not materialize.

According to the Central Bank, this wasn't just the result of temporary moratoriums. Banks entered the crisis with greater capital, higher reserves, healthier balance sheets, and more prudent lending policies.

The system, which was unprepared for the rapid deterioration of the situation during the banking crisis, managed to absorb a strong economic shock this time.

The old debt problem has not disappeared, however.

The very low rate of problems with recent loans does not mean that Cyprus has completely solved its private debt problem.

Debts incurred before the change in lending rules still remain in the statistics. Some old, unpaid loans were also sold to debt management companies. These loans disappeared from banks' balance sheets, but not necessarily from the lives of the debtors themselves.

Therefore, it is necessary to distinguish between two issues: the condition of currently granted loans and the burden of debt remaining from the previous crisis.

The former looks much better. The latter remains a problem for some households and businesses.

Good news, but not for everyone

Better quality new loans increase the stability of banks and reduce the likelihood of another crisis caused by mass defaults.

This doesn't mean, however, that getting a loan has become easier. Banks have reduced risk precisely because they are more cautious in assessing applications and are more likely to deny applications to clients whose income or financial situation doesn't provide adequate security.

The Central Bank's conclusions can therefore be summed up as follows: new loans are much healthier than they were years ago, but one of the reasons is that they are now being provided to a more selected group of clients.

Sources: Central Bank of Cyprus, Philenews.