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The research hub of Delfi Parters & Co has published its latest in-depth report on the most recent developments within Cyprus’ recovering banking sector. 
Focusing on the recent announcements made by many major Cypriot banks regarding their intention to reduce interest rates, the consulting firm analyses the effects this is expected to have on the progress of the economy at large.

“Traditionally, Cypriot banks used a high depositor interest rate compared to the rest of the Eurozone, in an effort to lure “hot money” from hedge funds and individual investors from overseas,” the report begins.

This had a knock-on effect on the domestic market, raising the cost of lending for businesses and households alike, says Delfi Parters. Following the banking crisis, the high depositor’s interest rate, coupled with the high risk of non-performing loans kept lending rates considerably higher than their Eurozone counterparts, placing a significant burden on the Cypriot economy.

Following the Central Bank’s decision for a 1% reduction in its base interest rate in Mid- February, all major Cypriot banks responded, lowering interest rates by 1% effective on the 1st of March 2014. 

Hellenic Bank, announced a reduction of 1%, as of March 1st, applicable to all loans connected to the bank’s basic interest rate, both serviced and non-performing. The 1% reduction is also applicable to all credit card loans. Bank of Cyprus also announced a 1% reduction on its basic interest rate, effective March 1st. The interest rate is applicable to all loans linked to the basic interest rate. Credit card loans will be reduced even further, by 2%. Non-performing loans will enjoy a 2% interest rate reduction once they become performing. Alpha bank publicized a 1.7% drop on all new consumer loans and new loans for small and large businesses. It also announced a reduction on all rates of interest on arrears for all its current loans, equivalent to a 1.2% interest rate reduction. 

Coop joined the commercial banks in announcing cuts across the full range of its performing loans. Housing loans were reduced by 1%, which, combined with the 1% reduction that was announced in early February, brings minimum interest rate down to 2.75%. Business loans saw a 2% reduction, with a minimum interest rate of 3%. Non-performing loans will also see a 0.5% interest rate decrease as soon as they are restructured and a further 0.5% decrease after 6 months of the restructuring provided that all the restructuring conditions were met during this period.

“The reductions in lending interest rates bring some much welcomed breathing room for households and businesses alike,” Delfi Partners explains, “facilitating the repayment of existing loans.” Indeed, the significant burden placed on the economy by the financial sector, through the high percentage of Non-performing Loans as well as the financial reforms that significantly restricted access to credit, was very rigid to respond to interest rate decreases in the wider Eurozone area. 

The Central Bank of Cyprus placed significant pressure on commercial banks for a reduction in lending rates and, by lowering the ceiling by 1 percentage point on its base interest rate, steering the commercial banks in the right direction while thankfully avoiding excessive legislative measures that would bring more harm than good, the firm notes.

Although the cost of credit in Cyprus is still amongst the highest in the Eurozone, the recent cuts in interest rates have brought the cost of credit closer to its Eurozone counterpart and will play a significant role in facilitating the economic recovery of our country, Delfi Partners concludes, both in terms of the sustainability of existing lending facilities and facilitating new business growth.