During the second quarter of 2023, the lending criteria for businesses and households remained strict, at similar levels observed in the previous quarter, indicating the caution of banks. At the same time, there was a decrease in loan demand, attributed to high interest rates and reduced consumer confidence.

As reported in the Bank Lending Survey by the Central Bank of Cyprus (CBC), for the second quarter of 2023, loan demand decreased across all loan categories, primarily due to high interest rates and decreased demand for financing fixed investments and durable consumer goods.

In detail, during the second quarter of 2023, lending criteria for both businesses and all household loan categories remained unchanged at the strict levels of the previous quarter. In the context of prevailing economic and financial conditions, banks seem to be cautious and particularly careful in extending new loans to maintain a low probability of non-performing loans.

At the same time, they pursue sustainable loan renegotiations where necessary. The dual approach of banks aims to mitigate risks and ensure the quality of their loan portfolios.

In the second quarter of 2023, the overall terms and conditions for granting new loans or credit limits to businesses became stricter, mainly due to an increase in banks' margins for higher-risk loans.

On the contrary, banks' margins for ordinary loans decreased on a net basis, although there were differing opinions among banks. Increased competition from other banking institutions restrained the tightening of overall terms and conditions for granting new business loans, while the remaining factors had a neutral impact, with banks' responses offsetting each other.

During the same period, the overall terms and conditions for granting new housing loans remained unchanged on a net basis, despite the net decrease in banks' margins for ordinary loans.

Reduced loan demand

From the demand perspective, during the second quarter of 2023, net loan demand in Cyprus from businesses and households for housing loans, for consumer loans and other loans continued to decrease.

According to the survey, the decrease in net demand for business loans during the second quarter of 2023 can be attributed to higher interest rates and reduced demand for financing fixed investments, although to a lesser extent than in the previous quarter.

On the other hand, demand for working capital and inventory financing continued to increase during this quarter, possibly due to high energy prices and the high cost of raw materials/products.

Regarding households, net demand for housing loans decreased during the second quarter of 2023, albeit to a lesser extent than in the previous five quarters. Banks attribute this decrease to high interest rates and worsening consumer confidence.

Expectations for reduced loans in the third quarter

For the third quarter of 2023, banks expect the lending criteria for business loans to remain unchanged compared to the previous quarter. However, stricter lending criteria are expected for all household loan categories, indicating that the moderation in new lending may continue.

In parallel, net loan demand in Cyprus is expected, according to the survey, to decrease further, both from businesses and for all household loan categories.

The CBC notes that the survey results reflect the perceptions and expectations of participating banks and do not necessarily reflect the views, expectations, or estimates of the CBC.