Cyprus businesses face stricter lending criteria — no change for households

Lending criteria for Cypriot businesses became stricter in the second quarter of 2024, according to a report released on Wednesday by the Central Bank of Cyprus (CBC).

The report explained that this tightening of lending criteria for business was primarily driven by a reduced tolerance for risk among banks.

The CBC pointed out that this tightening of lending criteria contrasts with initial expectations of stability, reflecting the uncertainty in the broader financial environment.

In contrast, loan approval criteria for households remained unchanged. This applied to both housing loans and consumer credit, where all the factors influencing these criteria were deemed to have a neutral impact.

The above insights were included in the CBC’s Bank Lending Survey (BLS) report, updated to include data from July, and covering the second quarter of 2024.

The survey highlighted changes in loan approval criteria, loan demand, and expectations for the third quarter of 2024, reflecting broader trends in Cyprus’ banking sector.

In addition, the CBC explained that the report primarily examined the supply and demand of loans across households and businesses.

Stricter loan criteria for businesses

The report showed that Cypriot banks imposed stricter lending conditions for businesses in the second quarter, a shift from previous predictions of unchanged criteria.

This tightening of conditions was primarily attributed to what the report calls “reduced tolerance for risk” on the part of the banks.

Both small and medium-sized enterprises (SMEs), as well as larger businesses, were all affected by this change.

“The stricter lending criteria were largely the result of reduced risk tolerance by banks, as evidenced by the shift in how loans were granted to both SMEs and larger corporations,” the CBC said.

In addition, the report highlighted that while other factors, such as capital costs, access to market funding, and liquidity constraints, remained stable, the perception of risk became a major driver for the stricter criteria.

However, the overall terms and conditions for business loans, such as interest rates and loan margins, remained largely unchanged after seven consecutive quarters of tightening.

The CBC found that there was “a decrease in interest rates for new business loans, while margins for standard loans also saw a reduction”.

Despite these improvements, the competitive pressures from other banking institutions have led to continued caution in lending.

Stable loan criteria for households

While businesses faced tighter loan conditions, household lending remained largely unaffected.

The criteria for housing loans and consumer credit were unchanged, in line with expectations from the first quarter of 2024.

All factors that influenced household lending criteria, including capital costs, liquidity, and competitive pressures, had a neutral impact.

For housing loans, the CBC observed that “the conditions for housing loans became somewhat looser for the first time since the first quarter of 2018”.

This relaxation was mainly driven by competitive pressures, which saw a reduction in interest rates and a narrowing of loan margins for standard home loans.

Similarly, the conditions for consumer credit and other household loans also remained stable, although a slight reduction in interest rates was noted.

Despite these relatively favourable terms, the demand for household loans has continued to decline, reflecting broader concerns about economic stability and rising interest rates.

Loan demand drops among households

One of the key takeaways from the CBC’s report is the continued decline in loan demand from households, particularly for housing and consumer loans.

The second quarter saw a further reduction in the demand for housing loans, with banks attributing this drop to higher interest rates and reduced consumer confidence.

“The demand for housing loans fell again during the second quarter, despite earlier expectations of stabilisation,” the CBC stated.

It cited the general rise in interest rates and declining consumer confidence as the primary reasons for this decrease.

Similarly, the demand for consumer credit also dropped, with reduced spending on durable goods further contributing to the decline.

The CBC’s findings show that consumers are being more cautious about taking on new debt, especially in light of rising borrowing costs.

The report also pointed out that “the overall reduction in demand for consumer loans reflects a broader pattern of decreased household spending on durable goods, driven by the ongoing rise in interest rates”.

Business loan demand holds steady

In contrast to households, the demand for business loans remained steady in the second quarter, marking the first time since early 2022 that business loan demand has not declined.

This stability in demand is attributed to an increase in financing needs for fixed investments, inventory, and working capital, which offset the negative impact of higher interest rates and reduced demand for mergers, acquisitions, and business restructurings.

“The overall demand for business loans remained unchanged, a positive sign after several quarters of decline,” the CBC said in its report.

Moreover, the demand from both SMEs and large enterprises held steady, reflecting the mixed economic conditions faced by businesses.

While higher interest rates and reduced merger activity have limited borrowing, the need for investment and capital has sustained overall demand.

Expectations for the third quarter of 2024

Looking ahead to the third quarter of 2024, the CBC expects loan criteria to remain unchanged for both businesses and households.

The stable outlook reflects expectations of continued caution in lending practices amidst ongoing economic uncertainties.

However, while the criteria are expected to remain the same, the CBC forecasts a further decline in demand for consumer credit and other household loans, driven by the persistent effects of higher interest rates and lower consumer confidence.

“For the third quarter, loan demand from businesses is expected to remain stable, while the demand for housing loans is also predicted to stay unchanged,” the CBC said.

“However, a further decline in demand for consumer credit is anticipated,” it added.

Rising loan rejection rates

An area of concern highlighted in the report is the rising rate of loan rejections, particularly for businesses.

The share of rejected loan applications increased in the second quarter, particularly for SMEs and large enterprises.

This rise in rejections corresponds with the stricter lending criteria imposed by banks, further complicating the borrowing landscape for businesses.

Similarly, rejection rates for household loans also rose, despite unchanged lending criteria.

This suggests that while banks have not formally tightened their lending conditions for households, they may still be exercising greater caution when approving loans.

“The share of rejected applications for both housing and consumer loans increased in the second quarter,” the report stated, indicating that even with unchanged criteria, banks are being more selective in their approvals.