The Cyprus Banking Sector Amid The Coronavirus Crisis

The coronavirus pandemic has had and will continue to have a significant impact in our personal and professional lives, in a way that has proved challenging and difficult to predict. Each government around the world has been taking measures not only in terms of health protection and for the purpose of reducing the spread of the virus, but also to safeguard their country’s financial stability, avoid business bankruptcies, maintain unemployment at a reasonable level and in general minimise as much as possible the economic downturn both for the private and public sector.

Some of the measures taken by the governments worldwide as well as in Cyprus, include the fiscal support through the distribution of funds to businesses, self-employed workers and employees. More specifically, financial support is provided directly to those affected by the crisis who meet the eligibility requirements, through the introduction of schemes for i) the partial and complete suspension of business operations, ii) the support to self-employed workers, iii) granting of special sick leave and the provision of an allowance to employees that cannot attend work for health reasons or to self-isolate and iv) granting of special parental leave and the provision of an allowance to employees in order to care for their children, following the suspension of operations for schools and kindergartens.

However, the capabilities of the public treasury are limited and therefore the government cannot be expected to directly provide financial support to every individual and business in need, for an indefinite period. As mentioned above, the duration of the crisis cannot be predicted, and the governments must manage to remain sustainable and versatile throughout this period.

The banking system is seen by some as the sector that will contribute in “healing” the economy, as it needs to be part of the solution by providing liquidity. Credit institutions as lenders are therefore expected to contribute to the government’s efforts in boosting the economy by ensuring that the affected businesses and individuals that meet certain eligibility criteria will be supported financially as needed and by taking part of the credit risk.

The below factors should be taken into consideration:

–            The risk to be taken by the banks should be assessed in conjunction with the great challenges they will face for the duration of the crisis. The fact that lenders will default on their loans and that central banks have introduced the imposition of lower interest rates for future loans, will inevitably put pressure on the banks’ profits.

–            The banking sector has lost its trustworthiness by the public, especially after the 2013 crisis, where it was seen as the problem rather than part of the solution.

Measures currently adopted by the Cyprus Government in connection with credit institutions:

The Cyprus parliament has enacted the Emergency Measures for Credit Institutions and Supervising Authorities Law 33 (I) 2020, whereby the Minister of Finance is authorised to issue decrees for its implementation, following a decision by the Council of Ministers and after consulting with the relevant supervising authority.

The first decree, dated 30 March 2020, orders that the obligation to settle any loan instalments, including the interest to credit facilities that have been granted and/or purchased and/or managed by credit institutions, is suspended for natural persons, public entities, self-employed and businesses (the “Beneficiaries”).

The above-mentioned suspension only applies to Beneficiaries that were not in arrears for the payment of their instalments beyond 30 days from the relevant due date, on the 29th of February 2020 and face financial difficulties as a result of the coronavirus pandemic.

The Beneficiaries ought to notify in writing (by email, fax, post) the credit institutions of their eligibility and interest in connection with the suspension, by submitting the relevant notice as included in the relevant decree.

After the expiry of the suspension period:

–            the total accrued interest that has been suspended, will be added to the total loan amount,

–            the suspended loan instalments (capital and interest) will not be immediately payable to the credit institution, unless otherwise agreed between the credit institution and the Beneficiaries,

–            the repayment period for the loan will be automatically extended as required until the final settlement of the loan amount (capital and interest).

For the duration of the suspension, the Beneficiaries have the right -by notifying the credit institution accordingly- to settle any instalments that would have been due, had the suspension not been applied.

The measures will be valid from the 30th of March 2020 until the 31st of December 2020.

Additional suggested measures in connection with credit institutions: Bank Guarantees

In addition to the above, the Minister of Finance has proposed the following measures for boosting the economy through the involvement of banks:

  1. Government guarantees of up to Euro 2 billion to be provided to banks that will cover:  i) loans in the amount of Euro 1,750,000,000 for businesses and self-employed workers and ii) part of the interest rate in the amount of Euro 250,000,000 for natural persons, businesses and self-employed workers.
  2. The above-mentioned amounts will not be used to cover any existing loans, but can be used to cover interest of existing loans that fall within the government’s scheme.
  3. The government guarantees will cover 70% of the potential damages from the above loans and the remaining 30% will be covered by the banks, regardless of whether the loan is with collateral or not.
  4. The duration of the loans will be between 3 months to 6 years, except for current accounts, where their duration will be for 1 year.
  5. The businesses and self-employed workers will be eligible for the loans, on the condition that they did not have any non-performing loans as at the 31st of December 2019.
  6. Guarantee to cover loans that have been or will be provided during the period starting from the 2nd of April 2020 until the 31st of December 2020.
  7. Liquidity to be used to cover the ongoing needs of the self-employed and businesses, settlement of their debts and the payment of salaries.
  8. Restrictions will apply as to the maximum amount to be provided to each individual or business and to the purpose for the loan.
  9. The relevant businesses and self-employed workers will only be eligible for the scheme, on the condition that none of their employees has been dismissed for reasons of redundancy from the date of issuance of the decree until the 31st of December 2020.
  10. Example of interest rate to be applied:

10.1.    For small and medium sized businesses:

  1. For loans of up to one-year duration, 0,75% with collateral and 1,25% without collateral.
  2. For loans of up to 3 years duration, 1% with collateral and 1,5% without collateral.
  3. For loans of up to 6 years duration, 1,5% with collateral and 2% without collateral.

10.2.    For large businesses:

  1. For loans of up to one-year duration, 1% with collateral and 1,5% without collateral.
  2. For loans of up to 3 years duration, 1,5% with collateral and 2% without collateral.
  3. For loans of up to 6 years duration, 2,5% with collateral and 3% without collateral.

The above-mentioned measures have been criticised by some political parties and have not been officially approved by the Cyprus parliament yet. The criticism is based on the arguments that the financial support should be provided directly to the public and that the banks should not be given the opportunity to take advantage of the crisis to their benefit. The lack of trust in the banking sector and the potential lack of government control for the provision of the said loans, creates scepticism by part of the public and the opposing political parties, that are yet to be convinced that the Cyprus banking sector is trust worthy and ready to assume the role of the “saviour”. However, the Minister of Finance clarified that the financial support would not be provided to the banks, but through the banks to the individuals and businesses in need. In addition, he supports that through the suggested measures the banks will be burdened with part of the risk and will be used as a transport mechanism of liquidity, without making profit.

In consideration of the controversies on the matter and the ongoing discussions, it is expected that before the approval of the scheme for government guarantees, the above measures will be amended based on recommendations from all the political parties and other relevant stakeholders, including the Auditor General.