On Monday, April 22, the Central Bank of Cyprus (CBC) governors said that the total volume of non-performing bank loans (NPLs) at local financial institutions has fallen below the €2 billion mark over the past year.
However, as most of these loans have been sold to distressed asset management companies, they are still having a negative impact on the island nation's economy.
In particular, according to the Central Bank, as of the reporting date of December 31, 2023, the total number of loans in the eight companies licensed by the CBC (including KEDIPES) exceeded 75 thousand and their value amounts to €21.5 billion, of which KEDIPES accounts for €6.4 billion. Meanwhile, loans with a combined balance of €10.8 billion belonged to households and the remaining €10.7 billion to companies. Of the total of €21.5 billion, €19.9 billion were classified as problem loans, while the rest were serviced regularly.
The CBC noted that the balance of non-performing loans in the real economy of Cyprus poses a potential threat, which is why the Ministry of Finance, the European Commission and rating agencies have continuously reiterated the need for an effective system for managing problem loans. At the end of December 2023, the ratio of non-performing loans to total loans has fallen to 7.9% from 9.5% in 2022 and 11% in 2021. The CBC believes that the continued downward trend in problem loans in the fourth quarter of 2023 is due to (in order of importance) loan charge-offs and repayments, as well as loans that have undergone restructuring.
As a reminder, problem loans include loans that are more than 90 days past due and classified as unsatisfactory, doubtful, and uncollectible.
Typically, the European Central Bank forces banks that have a lot of bad loans to hold more capital, which ends up slowing down the economy as banks have less money to make new loans. Non-performing loans are a persistent weakness in the Cypriot banking sector, although it is predicted that things will gradually improve. "Red loans" continue to pose a risk to the stability of the island's financial system and remain the main obstacle to the strengthening of the banking sector.