Tightening of lending criteria in Cyprus

The rise in daily Covid-19 infections in Cyprus toward the end of last year and the heightened uncertainty over the impact on the real economy led Cypriot banks to tighten lending criteria for corporate loans in the fourth quarter of 2021, the Bank Lending Survey issued by the Central Bank of Cyprus (CBC) has shown. 

The central bank said that lending criteria for household loans remained unchanged, while the expectations of the banks participating in the survey suggest that lending criteria will remain unchanged for the first quarter of 2022.

According to the CBC, factors that led to the tightened lending criteria for Cypriot businesses, both large corporates and small and medium-sized enterprises, were the banks’ perception of risk compared with the prospects of certain sectors of the economy, their general economic status and the reduced risk tolerance.

“The change [in lending criteria] may be due to the rise in Covid-19 cases because of the Omicron variant and its rapid spread among the population, increasing uncertainty about its impact on the real economy,” the CBC added, noting that this change was contrary to the expectations that the participating banks had harbored in the previous quarter.

The survey also recorded a net increase in demand for corporate loans in the fourth quarter of 2021 (for a second consecutive quarter), a demand associated with building reserves, working capital and fixed investments.

The CBC furthermore said that the rise in financing needs for reserves and working capital may be associated with the increase in commodity prices and other products due to supply chain disruption in international trade and the significant rise in transfer costs. 

According to the survey, the lending criteria both for mortgage and consumer loans remained unchanged.

Demand for housing loans recorded a significant increase in the fourth quarter of 2021, exceeding the banks’ expectations. The rise in demand is mainly attributed to the two government schemes for housing loans which ended in December 2021, the CBC added.

Moreover, demand for consumer and other loans remained unchanged for a second consecutive quarter in Q4, in contrast to the expectations of the participating banks during the previous quarter.