Elizabeth McCaul, a member of the ECB Supervisory Board, said that due to the coronavirus pandemic, EU countries, and in particular Cyprus, may be overwhelmed by a new wave of problem loans (NPL).
Despite the fact that the number of "red" loans on the island has significantly decreased recently, the problem is still very relevant for Cyprus.
According to the Central Bank of Cyprus, the share of non-performing loans in the country decreased to 17.6% in the second quarter of 2021 from 27.9% at the end of 2019. The decline is mainly due to the sale of NPL packages and to a lesser extent to their organic reduction.
Although Cypriot banks have made significant progress in reducing non-performing loans, their volume remains well above the European Union average. At the same time, the final impact of the pandemic still remains a source of uncertainty for the island's financial institutions.
According to McCaul, with the prevailing uncertainty, it is not easy to estimate the exact time and the final amount of accumulation of non-performing loans. Therefore, it is important for credit institutions to timely identify the difficulties of the borrower with the fulfillment of their obligations.
For example, banks should set minimum loss coverage levels for newly issued loans. She also proposed to apply the Directive on Credit Fund Managers, Loan Buyers and the return of collateral, as well as a strategic plan for the creation of national asset management companies.
It is worth noting that the EU stressed the risks associated with an increase in problem loans, and also pointed out that regulatory support for well-planned restructurings in response to such situations is a credit risk management tool.
Such a risk management tool, on the one hand, helps borrowers, and on the other hand, it can prevent the collapse of banks," McCaul said.
In this difficult environment, it is expected that the EU Recovery and Sustainability Fund will play an important role in implementing reforms to improve the bankruptcy system, as well as the judicial and administrative framework related to the effective management of problem loans.
Finally, McCaul noted that for a country like Cyprus, with a high level of non-performing loans, as well as with private debt, additional and continuous efforts are required, along with a purposeful and balanced economic development policy, to achieve a reduction in "red" loans and increase the sustainability of the country's real economy.
As you may know, non-performing loans are a permanent weak point of the country's banking sector, although it is predicted that the state of affairs will gradually improve. "Red" loans still pose a risk to the stability of the island's financial system and remain the main obstacle to strengthening the banking sector.