Cyprus has sharply improved bank asset quality, with non-performing loans (NPLs) falling from almost half of total lending to levels broadly in line with European Union averages.
But the underlying private debt problem has not disappeared. In an analysis published on the Central Bank of Cyprus website, Xenios Socratous of its risk analysis section said much of the debt burden has moved outside the banking system.
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NPLs Were A Broader Economic Problem
“The problem of NPLs was never simply a banking ratio. It was a macroeconomic constraint,” Socratous said.
Heavy bad-loan exposure tied up bank capital and limited new lending, while highly indebted households and businesses delayed spending and investment. The roots of the problem lay in rapid credit growth and property lending before the 2013 crisis, which left banks heavily exposed to construction, real estate and Greece.
Cyprus Accelerated The NPL Cleanup
Banks had also relied heavily on property collateral rather than borrowers’ repayment capacity. When property prices, incomes and confidence fell, collateral offered less protection, while slow foreclosure and insolvency procedures prolonged arrears.
At the height of the crisis, about half of bank loans were classified as non-performing. From 2015 onward, banks improved arrears management, borrower data, collateral valuations and restructuring, while legal reforms strengthened creditors’ position.
The cleanup accelerated from 2018 through large portfolio sales, including Bank of Cyprus’ Project Helix. The cooperative banking system followed a different route, transferring its healthy operations to Hellenic Bank and moving most problematic loans outside the banking system.
Stronger Banks Withstood COVID-19
The post-crisis banking model was tested in 2020, when about half of performing loans were covered by payment moratoria. A feared second wave of NPLs did not materialize, which Socratous attributed to stronger capital, higher provisions, healthier balance sheets and more conservative lending.
Private Debt Remains Outside Banks
Credit-acquiring companies, rather than banks, now hold most problematic loans, and many remain non-performing. Borrowers still face outstanding obligations, restructuring and recovery procedures, while collateral sales and large property portfolios can continue to affect the real-estate market.
Socratous also stressed that contractual debt and accounting values are different. A lower accounting value reflects expected recoveries after impairments and does not mean the underlying debt has disappeared.
The Broader Lesson
Socratous said Cyprus’ experience shows the importance of accurate loss recognition, effective insolvency and foreclosure systems, adequate provisions, sustainable restructuring and functioning secondary markets.
“Selling NPLs improves banks’ balance sheets, strengthens investor confidence and releases capital for new lending. The underlying credit risk, however, does not disappear. It is transferred to another creditor,” he said.
“The banks appear to have closed their own chapter of the crisis,” Socratous said. “For many borrowers, however, that chapter is still being written.”
