ACCORDING to new data provided by the ECB for August, despite the fact that interest rates on deposits in Cyprus have decreased dramatically – something that should have happened a long time ago – loan interest rates for households and businesses are however on the increase.

The data indicates that the great reduction in deposit interest to 2.0 per cent has not brought about any reduction in lending costs.

The ECB reports that interest rates for business loans had increased to 6.5 per cent in July compared to 6.35 per cent in June.

These are the highest in the eurozone, and much higher than Greece at 5.8 per cent. In Greece interest rates for loans for large and small and medium-sized enterprises fell slightly in fact from 5.84 per cent to 5.8 per cent.

Interest rates for business loans in Cyprus are almost 3.5 per cent higher than the eurozone average of 3.3 per cent.

Furthermore, interest rates for housing loans in Cyprus increased from 5.37 per cent in June 2013 to 5.6 per cent by July.

By comparison, the average interest rate for housing loans in the eurozone is 3.28 per cent.

All this comes at a time when interest rates for deposits are on a downward slide, and at their lowest levels since 2008. On top of that, interest rates for new deposits in Cyprus fell from 2.34 per cent to 2.24 per cent between June and July. During the same months last year, they stood at 4.5 per cent.

There are a number of possible reasons for the increase in lending rates. Since new loans are fewer it appears the increase is emanating from existing loans.

When banks ‘restructure’ a customer’s loan, such ‘restructuring’ is usually accompanied by other factors including an increase in the interest rate. This is known as‘re-pricing’, which often involves an additional rate of between 1.0 per cent and 3.0 per cent, depending on the level and basis of the existing rate on the loan.

As a result of these restructurings, households and businesses are unable to repay their loan installments which already bear high interest rates – the highest in EU.
Institutional stakeholders should wonder how large and small-to-medium-sized businesses will be in a position to repay loans which bear interest rates at the level of 7.0 per cent to 9.5 per cent.

As a result, non-performing loans in the banks’ portfolios are on the increase and loan restructurings, which are still being made have the effect of increasing interest rates.
Bankers will ‘correctly’ attribute this to the ‘increased risk’ involved in restructuring the loan.

We believe that this is the time to make radical changes. The announcements made by banks to the effect that interest rates will be reduced by 0.25 per cent to 0.5 per cent, are not sufficient in order to assist over-indebted households and businesses to breathe.

We are in need of the immediate intervention by the government to resolve this issue, as well as quicker reforms.

Dr George Mountis

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