Cyprus still has the highest non-performing loan (NPL) ratio in the EU according to the European Banking Authority, despite significant reductions achieved by the top three banks in the first quarter.
According to the EBA’s Report on the Dynamics and Drivers of Non-Performing Exposures in the EU Banking Sector dated July 22, which harmonised methodology for measuring NPLs, the Cyprus NPL ratio reached 49% in March 2016, followed by 47% for Greece, 19% for Portugal and 17% for Italy. The average NPL ratio for the EU-28 members plus Norway was just 5.7%.
The EBA said there was “high dispersion across jurisdictions, with the highest NPL ratios primarily for banks from countries that went through a more significant economic adjustment process.”
Cyprus also had the highest ratio of forborne loans, at 27%, followed by 20% for Greece, 14% for Ireland and 13% for Slovenia. The average forborne ratio for all 29 countries was just 3.5%.
“The FBL ratios show a similar dynamic, indicating a positive and high correlation between NPL and FBL ratio,” the EBA added.
Under EBA definitions, restructured forborne loans are still counted as NPLs for 12 months.
The EBA said that one of the major impediments to a reliable and fast insolvency procedure is the slow process and significant work‐overload of the judicial system in most countries, especially in those with high NPL ratios.
“Indeed, data indicate that the level of provisions is higher in countries where the duration of legal proceedings is longer,” it said.
In Cyprus reforms to foreclosure and insolvency procedures were held up until late 2015 owing to resistant from parliament.
“The link between the expected duration of insolvency proceedings and coverage ratios seems to confirm that provisions strongly depend on collaterals posted, recovery rates, and the speed of the recovery process.”
The EBA said that out of court restructuring of debt under judicial supervision could be an alternative path for many insolvent clients. “However, at the moment this does not seem to be a frequently used alternative.”