Share of non-performing loans in Cyprus falls from almost half of portfolio to EU level

Cyprus’s banks have all but resolved the problem of non-performing loans: their share has fallen from almost half of the total loan portfolio at the height of the crisis to levels close to the EU average. This is stated in an analytical paper by the Central Bank of Cyprus, prepared by Xenios Sokratous, an employee of the risk analysis department.

The crisis stemmed from the rapid expansion of lending after Cyprus joined the EU and adopted the euro. Banks were heavily exposed to developers and the construction sector, while loan decisions were based not on borrowers’ ability to repay but on the value of collateral. When property prices, incomes and confidence collapsed, collateral provided less protection than expected, while lengthy court recovery procedures and “extend and pretend” restructuring delayed the recognition of actual defaults.

The 2013 banking crisis, with the bail-in of deposits and capital controls, deepened the downturn. In 2014, the European Banking Authority introduced common reporting rules for non-performing loans. From 2015 to 2018, banks established dedicated units to deal with arrears, and from 2018 the clean-up accelerated: debts began to be sold in entire portfolios, with the Central Bank identifying Bank of Cyprus’s Project Helix deal as a turning point.

The updated system was put to the test by the pandemic: at the peak, around half of performing loans were covered by a payment moratorium, but no new wave of non-performing loans followed. The Central Bank attributes this to accumulated capital buffers and more cautious lending standards.

At the same time, most of the troubled debt did not disappear but was transferred to credit-acquisition companies: it remains unpaid, but is now off banks’ balance sheets, while borrowers continue to face recovery procedures. “The problem of non-performing loans was never simply a banking indicator. It was a macroeconomic constraint,” Sokratous notes. In his conclusion, banks have closed their chapter of the crisis, but for many borrowers it is still being written.