How are Cyprus banks handling the island's high rate of NPLs? Can more be done to combat them?

It is no secret that the Cyprus banking sector is struggling with the overwhelming level of Non-Performing Loans (NPLs), no matter the efforts exerted by the main banks in Cyprus by following conventional banking models to balance their profit/loss reports, NPLs remain to be the proverbial hole in the bucket.

How are Cyprus banks handling the island's high rate of NPLs? Can more be done to combat them?

Arguably, more radical and revolutionary approaches and actions should be considered by banks and lenders in Cyprus. Otherwise, their very existence may be put in jeopardy, given that the magnitude of NPLs that are eating away at their profit and capital adequacy, whilst absorbing their liquidity and resources. Consequently, Cyprus banks lack the ability to provide new loans to fund productive opportunities, which indirectly impacts the entire economy as a whole.

To combat the NPL crisis, banks are actively taking the following measures to reduce the deficit:

  • Outsourcing of specialised experts in debt recovery to help out banks that have realised NPL management is beyond their in-house resources.
  • Creating partnerships with experts to set up autonomous debt servicing platforms due to being outside the conventional banking business structure. Online loan servicing allows for a much greater degree of flexibility regarding the long-term sustainability of the solutions offered to borrowers.

However, there are more far-reaching, non-conventional methods of debt recovery that are currently not being utlised effectively by lenders in Cyprus:

  • Banks pooling their resources: A conceptually sound move would see smaller banks joining forces to create a shared independent debt servicing platform. Smaller banks would benefit from substantial economies of scale in terms of expenditure, resources, employee skills & efficiency.

  • Refine & Merge: The local banking sector is undeniably troubled by excess capacity with too many banks pursuing too few credit-worthy opportunities. The competition is intensified by the unprecedented growth of alternative online channels and financial technology companies as well as the sudden rising compliance, reporting & supervisory costs that all financial service companies are adjusting to in Cyprus.

  • Asset management companies (AMC): Going a step further, banks can also pool their resources to set up a joint local AMC. Undeniably, normal practice calls for the state to participate and play a fundamental role in such ventures. Although at present given the state of public debt in Cyprus, it seems unlikely that the state could afford to participate in such a venture, however it cannot be ruled out from becoming an obligatory requirement in future, should progress towards the cleaning up of bank balance sheets prove insufficient.

Successful upheavals are classically measured in terms of revival speed, determination; unrelenting perseverance with a large degree of flexibility and adaptability. These are not typical traits of the conventional set-up of banking rationalism and traditionalism.

During these critical times in Cyprus, whereby banks are striving to make ends meet and to refine the deficit which is overpowering their survival; ground-breaking moves in future may be the only way to revolutionise the future of the islands banking sector.


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