As announced at the beginning of September 2015, the Central Bank of Cyprus, in its endeavour to incentivise banks to increase the volume and improve the quality of restructurings for loans presenting arrears over 90 days but also to take proactive action for the loans presenting arrears over 30 days to prevent them from becoming non-performing, has set targets for four indicators that were applied to the whole loan portfolio and to sub-portfolios (residential mortgage loans to households, other loans to households, loans to non-financial corporations with total balances of up to €1mln and loans to non-financial corporations with total balances of over €1mln) .
In this connection, the attached table below provides the actual performance for each indicator compared to its target for the third quarter of 2015. The table also presents the targets set for the fourth quarter of 2015 and for the first quarter of 2016.
The overall picture is that there is an under-performance of the target for the first indicator (proposed sustainable solutions) for which the target was 9,42% but the actual realisation was 6,28%. A smaller underperformance was observed for indicator 2 (concluded sustainable solutions) for which the target was 7,45% but the actual realisation was 6,53%. However, an over-performance was observed for the other two indicators. Specifically, the target for indicator 3 (loans that have been restructured and present arrears of less than 8 days) was 66,49% and the actual realisation was 68,20%. The target for indicator 4 (Loans that presented arrears of 31-90 days at the beginning of the quarter but by the end of the quarter do not present any arrears) was 27,82% and the actual realisation was 31,22%.
The major factors which have led to the under-performance relative to the targets were the focus of some banks to the restructuring of loans which did not present arrears over 90 days in order to avoid their development into non-performing and the implementation of restructuring solutions which had been offered before 1st September 2015. Also, some banks are reporting factors that delay the process of examining requests for restructurings such as the failure of borrowers to submit timely and adequate information on their income, the time spent in discussions with customers before they can finalise a restructuring proposal and, in some cases, setbacks from borrowers changing their minds on a restructuring offer to which they had initially agreed to. Banks are taking measures to be able to meet the targets set for the fourth quarter of 2015 and the first quarter of 2016.
It is reminded that the indicators for which targets have been set are:
1. Indicator 1: Proposed sustainable solutions as a percentage of the loans presenting arrears over 90 days. This indicator is not cumulative and is calculated for the quarter under reporting and for each of the next quarters.
2. Indicator 2: Concluded sustainable solutions as a percentage of the loans presenting arrears over 90 days. This indicator is not cumulative and is calculated for the quarter under reporting and for each of the next quarters.
3. Indicator 3: Loans that have been restructured and present arrears of less than 8 days as a percentage of the total loans which have been restructured. This indicator is cumulative and covers the loans restructured from 1st January 2014 up to the beginning of the quarter under reporting and measures the success rate of the loan restructurings.
4. Indicator 4: Loans that presented arrears over 30 days and up to 90 days at the beginning of the quarter but by the end of the quarter do not present any arrears (due to restructuring or other measures taken by the bank) as a percentage of the loans that presented arrears over 30 days and up to 90 days at the beginning of the quarter. This indicator is intended to exert pressure on the banks to act proactively on loans with early arrears before they become non-performing. It is reminded that a non-performing loan that is restructured, remains classified as non-performing for at least 12 months even if the new repayment program is fully adhered to and there are no arrears.
Table: Banking System's Loan Arrears Resolution Targets.