NICOSIA, Feb 5 (AFP): Banks in recession-hit Cyprus, reeling from a financial crisis, are struggling with non-performing loans that make up nearly half their lending and are hampering efforts to finance a cash-starved economy.
The central bank says banks' liquidity is sufficient to absorb NPLs up to a certain point, but fast action is needed as the figure is rising.
So government, lenders and borrowers are seeking ways to reverse the trend without further damaging an economy forecast to contract by 8.7 per cent in 2013 and another 3.9 per cent this year.
The total of NPLs -- defined as loans more than three months in arrears or rescheduled several times -- was 23 billion euros ($31 billion) at the end of September, according to the latest central bank figures.
That is well in excess of GDP that stands at only 17 billion euros, and represents 42.3 per cent of total lending.
Fiona Mullen, a director at research consultancy Sapienta Economics Ltd, said they could soon reach 50 per cent, before stabilising later this year.
Central bank Governor Panicos Demetriades has bluntly declared that management of NPLs and restructuring of loans in general present "the biggest challenge facing the banking sector in Cyprus."
Traditionally, Cypriot banks have not had a culture of chasing down delinquent borrowers.
A big chunk of NPLs is owed by powerful Cypriot business groups -- not only developers but also commercial conglomerates -- who have been able to use creative accounting to avoid meeting their obligations.
A source at the central bank has said six billion euros, or 26 per cent of NPLs are owed by only 30 borrowers.
There is also the fact that, even if banks want to act, out-of-date legislation makes foreclosure a difficult and lengthy proposition.
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