In the second quarter of 2023, lending criteria to businesses and households remained at the strict levels of the previous quarter
In the second quarter of 2023, lending criteria to businesses and households remained at the tight levels of the previous quarter, indicating bank caution. At the same time, there was a decrease in loan demand, which is due to high interest rates and reduced consumer confidence.
As reported in the Central Bank of Cyprus (CBC) Bank Lending Survey (BLR) for the second quarter of 2023, loan demand decreased for all loan categories, mainly due to high interest rates and reduced demand for financing fixed investments and the purchase of consumer durables .
More specifically, according to the Survey, during the second quarter of 2023, the criteria for granting loans to both businesses and all categories of loans to households remained unchanged at the strict levels that applied in the previous quarter. In the second quarter of 2023, all factors influencing lending criteria, across all loan categories, had a neutral impact. In light of the current economic and financial conditions, banks appear to remain cautious and particularly cautious in granting new loans, so as to keep the possibility of an increase in non-performing loans low.
At the same time, they seek sustainable loan renegotiations where necessary. The banks' two-pronged approach is aimed at mitigating risks and ensuring the quality of their loan portfolios.
In the second quarter of 2023, the overall terms and conditions for granting new loans or credit lines to businesses were tightened mainly due to an increase in the margin (difference against a relative reference rate) of banks for higher risk loans.
In contrast, banks' margin for conventional loans decreased on a net basis, but there were mixed views among banks. Increased competition from other banking institutions held back the tightening of overall terms and conditions for granting new business loans, while other factors had a net neutral impact, with banks' responses offsetting each other.
In the same quarter, the overall terms and conditions of granting new housing loans remained unchanged, on a net basis, despite a net reduction in banks' margin for conventional loans. For new consumer and other loans to households, there was a tightening of the overall terms and conditions of granting which concerned the banks' margin for both conventional loans and higher risk loans (margin increase) and was influenced by the banks' perception of increased risk.
Reduced demand for loans
On the demand side, during the second quarter of 2023, the net demand for loans in Cyprus from businesses and households for housing loans and, more so, for consumer and other loans continued to register a decrease.
In the decrease in net demand of business loans in the second quarter of 2023, according to the Survey, were contributed by higher interest rates and reduced demand for fixed investment financing, although to a lesser extent than in the previous quarter.
On the other hand, demand for inventory and working capital financing continued to increase this quarter, possibly due to high energy prices and high raw material/product costs.
In terms of households, net demand for mortgages in the second quarter of 2023 fell, but by a smaller extent than in the previous five quarters. The decline in mortgage demand during the quarter in question is attributed by banks to higher interest rates and deteriorating consumer confidence. Accordingly, the decrease in demand for consumer and other loans is also attributed, according to the Research, to the decrease in consumer confidence, to the general level of interest rates and to the decrease in spending on the purchase of durable consumer goods.
Reduced loans expected for the third quarter as well
For the third quarter of 2023, banks expect the criteria for granting business loans to remain unchanged compared to the previous quarter. Accordingly, stricter lending criteria are expected for all categories of loans to households, which suggests that the moderation in new lending may continue.
At the same time, the net demand for loans in Cyprus is expected, according to the Research, to further decrease, both from businesses and for all categories of loans from households.
The CBC notes that the results of the survey reflect the perceptions and expectations of the bank survey participants and do not reflect any perceptions, expectations or CBC estimates.
