Bank loan

Snapshot: regulation of bank credit facilities in Cyprus

Regulation

Capital and liquidity requirements

Describe the impact of capital and liquidity requirements on the structure of bank lending facilities, including the availability of related facilities.

Cyprus has implemented the Basel III liquidity requirements with regard to the liquidity coverage ratio, as specified in Regulation (EU) 575/2013, which is directly applicable to Cyprus. Regulation (EU) 575/2013 did not implement the liquidity requirements regarding the net stable funding ratio and provides that institutions comply with a general funding obligation until the introduction of the net stable funding ratio.

Banks hold liquid assets whose sum of values ​​covers cash outflows minus cash inflows under stress conditions, to ensure that banks maintain sufficient levels of liquidity buffers to deal with any likely imbalances. between outflows and inflows of liquidity under highly stressed conditions over a period of thirty days. In times of stress, banks are able to use their liquidity to cover their net outflows.

Banks should not double-count cash inflows and liquid assets and should maintain a minimum liquidity coverage ratio.

Lending policies tend to revolve around providing credit facilities to customers with proven repayment capacity. The fundamental lending principle of banks is to provide credit facilities only when the potential debtor appears able to pay and when the terms of such facilities are consistent with the debtor’s income and financial situation, regardless of any collateral (which is a secondary source of reimbursement). The impact of credit facilities granted to customers in other countries is also taken into account.

Disclosure requirements

For debtors of public enterprises, are there any disclosure requirements applicable to bank loan facilities?

The laws and regulations applicable to public enterprises (listed on a regulated market or otherwise) require that each public enterprise disclose in its annual accounts the details of each material agreement. Regarding public companies listed on the regulated market of the Cyprus Stock Exchange, the relevant announcements should be made on the Cyprus Stock Exchange.

Use of loan proceeds

How is the use of the proceeds of bank credit regulated by the debtor? What liability could investors be exposed to if the debtor uses the proceeds in a way that is contrary to the regulations? Can investors mitigate their liability?

The proceeds of the bank loan must be used for lawful purposes and subject to the conditions and restrictions in the documentation relating to the facilities. Any contrary action by the debtor may, subject to the terms of the document concerned, result in an event of default, as well as the nullity of the agreement due to the illegality of the objects in part, or voidable at the choice of the lender whose consent has been obtained by fraud or misrepresentation. In addition, the use of these products must always be in accordance with the purpose of the debtor’s activities as indicated in his deed of incorporation.

Banks exercise due diligence on the purpose and use of the proceeds of bank loans. Directive 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing has been transposed into domestic law and the Central Bank of Cyprus ( CBC) published the 5th edition of the Directive on the prevention of money laundering and terrorist financing.

Cross-border loans

Are there regulations that limit an investor’s ability to extend credit to debtors organized or operating in particular jurisdictions? What liability do investors face if they lend to such debtors? Can investors mitigate their liability?

Law for the implementation of the provisions of United Nations Security Council resolutions (sanctions) and decisions and regulations of the Council of the European Union (restrictive measures) Law 58 (I) of 2016, as amended, applies to Cypriot credit and financial services. establishments. Criminal liability may be incurred for parties who break the law.

The CBC has also issued a directive on sanctions addressed to the institutions it oversees. Under this directive, supervised institutions should have a sanctions policy, outlining the principles to be followed to comply with the requirements of applicable sanctions frameworks and mitigate risks.

Debtor leverage profile

Are there limits to an investor’s ability to extend credit to a debtor based on the debtor’s debt profile?

Regulation (EU) n ° 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements applicable to credit institutions and investment firms, was amended by Regulation (EU) 2019/876 introduced a 3 percent leverage ratio requirement. The corresponding change will apply from June 28, 2021.

In terms of granting facilities, the CBC has issued a relevant directive which:

  • prescribes best practices to be followed by banks in the process of assessing applications for new performing credit facilities and reviewing existing ones;
  • provides examples of the documentation that banks should consider obtaining during the process of assessing an application for a new credit facility or reviewing existing performing credit facilities, applying the principle of proportionality and taking into account the complexity and risk of each case; and
  • incorporates the minimum requirements for the assessment of the creditworthiness of borrowers as set out in the European Banking Authority’s guidelines on credit assessment.

Interest rate

Do regulations limit the interest rate that can be charged on bank loans?

Usury is a criminal offense punishable by conviction with imprisonment or a fine, or both. It is prohibited for a person to receive, collect or charge interest at a rate above the interest rate cap during the provision of any loan period. In accordance with the Cypriot Penal Code Cap.154, the Central Bank of Cyprus has the power to calculate the benchmark interest rate every three months, which is currently set at 8.82 percent.

Said benchmark rate and ban do not apply to bank loans and are usually calculated as the average annual interest that banks charge for consumer loans increased by half, with a minimum increase of 5 percentage units and maximum of 10 percentage units.

Currency restrictions

What are the limits imposed on investors who finance bank loans in a currency other than the local currency?

There are no restrictions on capital movements (including with reference to countries outside the European Union), nor exchange control restrictions. The CBC has issued guidelines on reasonable liquidity in all currencies and local debtors are not limited to borrowing in any foreign currency.

Other regulations

Describe any other regulatory requirements that impact the structure or availability of bank credit facilities.

Cyprus has enacted legislation regulating the sale and purchase of credit facilities granted by credit institutions. The credit facilities falling within the scope of the Law are:

  • any credit facility agreement, including but not limited to credit card loans and overdrafts, the amounts of which remain unpaid, whether such facility has been terminated or expired; and
  • the rights and obligations of a creditor to a principal debtor resulting from a judgment of a civil court relating to a credit facility, provided that amounts remain unpaid under that judgment.

The following entities may acquire credit facilities in accordance with the provisions of the law:

  • credit acquiring companies established in Cyprus and authorized to acquire credit facilities in accordance with the provisions of the law by the BCC, which must have a paid-up share capital of at least € 100,000;
  • credit institutions authorized in Cyprus;
  • credit institutions authorized and supervised by the competent authorities of an EU Member State and authorized to establish a branch in Cyprus; and
  • financial institutions which are subsidiaries of credit institutions authorized in an EU Member State and which provide services or carry out activities in Cyprus through a branch in Cyprus established under Cypriot law.

In addition, there is a Cypriot framework for the securitization of bank loans. Securitization consists of operations which allow a lender or a creditor – generally a credit institution or a company – to refinance a set of loans, exposures or receivables, by transforming them into negotiable securities accessible to investors.

By enacting the Law on Securitization of Credit Facilities or Other Forms of Claims or Exposures, L. 88 (I) / 2018, Cyprus established a framework for the securitization of credit facilities in Cyprus. It is envisaged that the law will facilitate the secondary loan market, which may therefore strengthen efforts to reduce non-performing loans. The legislation gives the BCC regulatory and supervisory powers of securitizations under the law, which is largely inspired by the definitions of Regulation (EU) 2017/2402 establishing a general framework for securitization and creating a specific framework for a securitization. simple, transparent and standardized securitization.

However, the scope of the law is limited to the securitization of credit facilities or other forms of receivables or exposures created or acquired by credit institutions, financial institutions or credit acquisition companies. , provided that they are subject to the control of a competent authority. For this purpose, a competent authority includes the BCC and, in the case of branches of credit or financial institutions established in another Member State, the competent authority of the home Member State.