The Co-operative Central Bank is not waiting around for the implementation of foreclosure legislation and instead is taking the initiative to tackle non-performing loans (NPLs) – which are around 55% – a similar ratio to Bank of Cyprus.
In an interview with the Cyprus Weekly, Co-operative Central Bank chairman, Nicholas Hadjiyiannis, outlined the ‘three-pillar’ approach that significantlyincreases a borrower’s incentive to pay. “We have a large number of small clients. So we need to work through a bigger volume and use more standardised solutions,” he said.
The first pillar focuses on making contact with the client and offering a simple and fast way to resolve the problem. “We don’t want to wait for them to come in,” said Hadjiyiannis.
A good example of this approach is student loans. In the past, before the 93 co-operatives were consolidated into 18, each institution offered a different package for loans. Now, all performing loans will be offered at 4.75% irrespective of collateral.
The second pillar focuses on streamlining – using technology, simplifying decision-making processes and improving the quality of data – and is part of a commitment to the Troika of international lenders, who recapitalised the co-operatives with €1.5 billion in February 2013.
The third pillar offers financial incentives to pay in order to “encourage borrowers to approach us”, Hadjiyiannis said.
Last week, even before the Central Bank of Cyprus had announced its measures designed to cut lending rates, Co-operative Central Bank reduced lending rates on performing housing loans by 1%.
One percentage point means that instead of paying, for example 7%, for your mortgage, you would pay 6%. Interest rates on performing student loans and agricultural loans were cut even further, by 2%. Borrowers who agree to a restructuring programme get half the interest benefit immediately.
Once the restructured loan has been performing for six months they get the full benefit. Then after six months the overdue interest rate also disappears.
“That is a huge incentive to come in and talk. … If someone does not come in after that then you might want to assume that their loan is not viable,” says Hadjiyiannis.
The interest-rate reductions are not without cost of course. Together the drop in interest rates for residential, agricultural and student loans affect around €3 billion loans, or 30% of the total. “The average interest rate reduction is costing us a lot of money. But a few tens of millions are a drop in the ocean compared with our balance sheet,” said Hadjiyiannis. “And it makes business sense because we are supporting the performing part of the loan book.”
Trust is returning
After persistent – though false – rumours in 2013-14 that the co-operatives would be subject to a haircut like Laiki and Bank of Cyprus, trust is now returning.
EU-wide stress tests in October showed the co-operatives to be well capitalised even under the ‘adverse’ scenarios.
After a decline of deposits in advance of the stress tests, deposits have now started to flow back. Net inflows between November and January reached €330 million and the inflows in February have been the “best so far” according to Hadjiyiannis.
A recent survey found that the co-operatives were the second most highly respected institution after the Church.
This is partly down to the structure of the co-operatives, which traditionally had a branch in almost every village and have tended to lend to individuals rather than big business. “The co-operatives have a special place in the hearts of the people… The recent deposit inflows reflect that trust has returned,” said Hadjiyiannis.
Supporting the young and entrepreneurs
This feature of the co-operatives also gives them a special role in the country’s recovery.
“We only have Cypriot clients … our future is tied with the future of this place,” said Hadjiyiannis. This is why the Co-operative Central Bank has launched a new programme to grant 75 partial scholarships every year: 50 for studying at local universities, 10 for local colleges and 15 for study abroad.
In four years there will be 300 students with partial scholarships amounting to €600,000 per year.
“Family is important for Cypriots. So through scholarships and the reduction of student loans we wanted to support one of their most important needs.”
The tradition of small family businesses is also why Co-operative Central Bank is supporting entrepreneurs in the production, packaging and selling of agricultural products. In cooperation with the Ministries of Agriculture and Commerce small companies can receive a fixed interest rate of 3.8% for up to 12 years to buy or upgrade existing equipment.
This is part of an EU programme whereby the Co-operative Central Bank pre-finances the subsidy in full. “We are going to do more and more of this. We see this as a potential growth prospect for Cyprus,” said Hadjiyiannis.