By Angelos Anastasiou
A plausible answer to the mysterious delay in restructuring the fearsome mountain of unserviced loans burdening Cypriot banks’ balance sheets could lie in a bill prepared by the Central Bank of Cyprus and approved by the cabinet last month, the Sunday Mail has learned.
As the persistent threat of non-performing loans looms ever larger over virtually every bank in Cyprus, Costas Melas – the formerly combative head of the borrowers’ association – isn’t even hopeful any more.
“Loans aren’t being restructured,” he told state radio earlier this week.
“Proof of this is the fact that non-performing loans have increased and continue to increase. And what’s more, out of the total loans restructured so far, almost three in four are back in the non-performing column.”
Interestingly, outgoing Bank of Cyprus CEO John Patrick Hourican did not deny the constipated pace of loan restructurings – instead, he tacitly acknowledged it, but crucially blamed it on a getting-away-with-it mentality he attributed to borrowers.
“It is the case that we do all we can to help vulnerable people. But it is not the case that we are offering blanket solutions to anyone who is a borrower to come and have a discount on a loan which depositors have to pay for. That would be immoral, unethical, terrible business practice,” Hourican argued at a press conference on Wednesday.
“When you borrow €100 from the bank, 85 per cent of that is taken from depositors, and not paying back money to a bank is not paying back depositors. So I have very little patience for the remarks of associations in general, and I have great sympathy for individuals in distress who come and talk to us because we absolutely want to help, but what we cannot have is these general remarks about bad banks doing bad things to good people because that is not the case,” he added.
But one source, an advisor to distressed borrowers who have sought to have their loans reorganised by the Bank of Cyprus, sided with Melas, saying that the bank has no one else to blame for its poor restructuring record. Speaking on condition of anonymity, the man was clearly frustrated and attributed the lender with a sinister agenda.
“The BoC makes restructuring proposals on the basis of what it wants to get back from borrowers, not on the basis of what the borrowers can pay,” he said.
“It is my suspicion – and it is shared by others – that the bank is deliberately avoiding effective restructurings because it wants to sell the troubled loans later on. The slow pace of restructurings cannot be justified otherwise.”
The suspicion relates to an upcoming piece of legislation that will allow banks to sell loans on to other banks – or hedge funds – at a risk-mitigating discount, with the new owners of the loan then taking over the effort to collect on the outstanding loan. The seller will conveniently earn a fair lump-sum consideration for a loan it may otherwise take years to collect on, and the buyer will have an asset to liquidate, without the need to preserve – or even foster – a business relationship with the owner.
Fears of greedy, faceless, predatory firms storming in to buy distressed loans so that the properties backing them can be summarily foreclosed have already emerged. The bill was prepared by the Central Bank of Cyprus and approved by the cabinet last month, but implementation remains incumbent on parliamentary endorsement.
According to the anonymous banking specialist, perhaps the best-kept secret in the whole affair is that restructuring loans isn’t quite the daunting task it has been made out to be.
“It’s not rocket science, you know,” he said.
“You look at what the amount owed is, and you basically play with the repayment period and the interest rate until you hit the right mix.”
But in broad strokes, he added, an initial period of three to five years should take into account only what the borrower can pay – not what the bank would like to receive.
In a Q&A session on Wednesday, Hourican affirmed his focus on eliminating emergency liquidity from the bank’s balance sheet, a remark that caused some irritation.
“It’s not good for Mr Hourican to tell us that he plans to reduce ELA – who cares?” the exasperated adviser said.
“The bank’s single biggest problem is non-performing loans. Why do they not publish what they have successfully restructured? We need a lot more transparency.”
However, Melas argued, it’s not just banks that are to blame. While the Central Bank is fully aware of the situation, it does nothing to address it, despite having all the necessary tools at its disposal.
“The CBC just doesn’t care,” he said.
“Administration of non-performing loans is done erratically, without planning, and there are a great many problems. Yet the CBC remains inert and indifferent, it does nothing – despite having extraordinary means of pressuring the banks. Which is precisely its role: if a bank does not conform to the accepted behaviours, the CBC is tasked with bringing it in line.”
The anonymous adviser concurred.
“The CBC is basically issuing codes of conduct, but are they monitoring whether they are being implemented?”
The Central Bank was unavailable for comment for this piece.
Normally lively and passionate in conversation, a clearly dejected Melas was asked by the radio-show host on Wednesday morning whether he has lost all hope.
“I am very disappointed because I see a bad situation becoming entrenched,” he intoned colourlessly.
“It saddens me that no one is lifting a finger to change it. I am pessimistic because I don’t see unserviced loans being managed properly, and I fear this may lead to unpredictable and irreversible consequences.”
