## cr18338 ## Source details **Canonical URL:** [cr18338](https://www.imf.org/-/media/files/publications/cr/2018/cr18338.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18338.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18338.pdf.json) --- ### A. Background - A key economic challenge in Cyprus is the large stock of non-performing loans (NPLs). - The paper discusses recent trends in the evolution of NPLs and identifies key challenges in reducing NPLs. - The paper examines main sources of financing underlying the recovery and whether they can sustain longer-term growth given the need for deleveraging. ### B. Evolution of NPLs - Size and composition (as of Q2:2018 unless otherwise noted): - NPLs: 39 percent of total loans (second-highest in euro area) and 85 percent of GDP (highest in euro area). - Small borrowers (households and micro, small and medium-sized enterprises (SMEs)) owe more than 90 percent of the NPLs. - NFC NPL sectoral composition: - Tourism and trade: €2.3 billion, 36 percent of NFC NPLs. - Construction: €1.8 billion, 28 percent. - Real estate: €0.9 billion, 14 percent. - Status and historical path: - About one-half of NPLs relate to terminated accounts (outstanding balance has been called in); about one-third of NPLs have been restructured. - NPLs increased from 13 percent of total loans (or 64 percent of GDP) in 2010 to 48 percent of total loans (or 161 percent of GDP) in 2014 (peak year). - Since the 2014 peak, NPLs declined to 39 percent of total loans (or 85 percent of GDP) by 2018:H1. - More than two-thirds of the NPL reduction was made by NFCs; reduction by households has been more limited. - Much household NPLs reflect housing loans or loans collateralized by primary residences. - Legislative and institutional developments: - Legislative reform on sale of loans, foreclosure, and insolvency were undertaken during 2014–15, but use of foreclosure was limited due to uncertainty on legacy cases, unpopular auctions and protests, and potential court delays from challenges and appeals. - Personal repayment plans (PRPs) introduced in the 2015 insolvency reform have been rarely used. - Sale of NPL portfolios was limited until recently. - 2018 amendments addressed shortcomings: clarified applicability to legacy cases; allowed electronic auctions; facilitated auction process. - New sale of loans law allows creditors to break down the mortgage in multiple pieces and gives buyers increased access to data; securitization law was approved. - NPL flows (Q3:2017–Q2:2018; stock at beginning normalized to 100): - Outflow: 45.4 (of which write-offs about one-third, sale of loans about one-third, migration to performing category 20 percent, NPL cash repayment 10 percent, debt-to-asset or equity swaps 6 percent). - Inflow: 17.5. - Net outflow: 27.9. - Specific flow components (billions of euro, period up to June 2018): - write-offs 15.6; - debt instruments held for sale 13.6; - migration into performing 8.7; - NPL cash repayment 4.8; - debt-to-asset/equity swaps 2.7; - one-time interest gross-up (due to IFRS9) 3.9; - interest accrued on NPLs 4.5; - migration from performing 9.0. - Other developments: - Bulk of NPLs previously owned by the Cyprus Cooperative Bank (CCB) moved out of the banking sector in 2018:Q3 to a newly created state-owned asset management company. - Outflows by cash repayments or migration into performing category have not substantially accelerated despite GDP growth above 4 percent annually since 2016 and a strong recovery in employment. - Sustainable restructuring is challenging: almost two-thirds of restructuring flow is on loans already restructured at least once; redefault rate on loans restructured one year before increased in 2018:Q2. - Loan loss provisions at Cypriot banks are close to 50 percent of NPLs, slightly above the EU average, as of 2018:H1; provision ratio has increased steadily since 2014. - ECB data indicates provisioning and collateral coverage is close to 100 percent of NPLs. - Accumulation of provisions has facilitated sale of NPLs by banks. ### C. Key Challenges to Reducing Household Sector NPLs - Methodology: - Uses Household Finance and Consumption Survey (HFCS) data to assess household repayment capacity and potential strategic behavior. - Low repayment capacity — HFCS and balance-sheet indicators: - Median net wealth in Cypriot households decreased by 36 percent between “Wave 1” (2009–10) and “Wave 2” (2014); euro-area average change was 4 percent. - Real assets decreased by 30 percent; financial assets decreased by 29 percent; liabilities increased by 26 percent; gross income decreased by 30 percent. - Debt-to-income ratio increased from 1.57 to 2.51 (euro-area average 0.72). - Debt-service-to-income ratio for indebted households is 36 percent (euro area 14 percent). - Debt burdens especially heavy for households in bottom-20-percent income or wealth level: debt-service-to-income ratio for lowest-20-percent income level is over 140 percent (euro area 25 percent). - Nonfinancial private sector’s debt service ratio remains relatively high at 20 percent of GDP, as of 2018:H1. - HFCS medians (thousands of euros; Wave 1 = 2009–10, Wave 2 = 2014): - Real assets: Wave 1 314; Wave 2 218; Change -30. - Household main residence: Wave 1 240; Wave 2 200; Change -17. - Financial assets: Wave 1 221; Wave 2 16; Change -29. - Deposits: Wave 1 16; Wave 2 12. - Voluntary pensions and life insurance: Wave 1 16; Wave 2 10; Change -38. - Liabilities: Wave 1 60; Wave 2 76; Change 26. - Mortgage debt: Wave 1 87; Wave 2 100; Change 15. - Net wealth: Wave 1 267; Wave 2 170; Change -36. - Gross income: Wave 1 322; Wave 2 3; Change -30. [Note: HFCS table as supplied] - Net wealth of households, medians (thousand euros): - Cyprus Wave 1 267; Wave 2 170; Change -36; Euro area Wave 1 108; Wave 2 104; Change -4. - Financial burden indicators, medians: - Debt-to-income ratio: Cyprus Wave 1 1.57; Wave 2 2.51; Euro area 0.63; 0.72. - Debt-service-to-income ratio: Cyprus Wave 1 0.23; Wave 2 0.36; Euro area 0.14; 0.14. - Mortgage-debt-service-to-income ratio: Cyprus Wave 1 0.25; Wave 2 0.34; Euro area 0.16; 0.16. - Debt-to-asset ratio: Cyprus Wave 1 0.17; Wave 2 0.23; Euro area 0.22; 0.26. - Loan-to-value ratio of main residence: Cyprus Wave 1 0.32; Wave 2 0.42; Euro area 0.38; 0.44. - Weak repayment discipline and strategic behavior: - Aggregate financial position: Cypriot households own financial assets exceeding liabilities by 100 percent of GDP, as of 2018:H1. - HFCS indicates median household net wealth in Cyprus about €170,000, exceeding euro area average €104,000 (as of 2013). - Outstanding loans by a median Cypriot household are 23 percent of total assets, lower than euro-area level of 26 percent. - For bottom 20 percent households, net wealth levels are similar between Cyprus and the euro area. - Fraction of households with negative net wealth was 6.9 percent in Cyprus; euro-area level 5.2 percent. - A sizable share of NPLs, particularly among wealthier debtors, could likely be serviced through disposal of assets—suggesting strategic default behavior given weak enforcement and non-credible foreclosure threat to date. - Average time to foreclosure is long; weak claims enforcement reduces credibility of foreclosure threat. ### D. Policy Implications - Objectives: - Addressing NPLs to lower borrowing costs and reviving credit supply will be important for supporting longer-term growth. - Resolution of the NPL overhang would help restore the credit channel and contribute to sustainable longer-term growth. - Legislative and institutional actions: - 2018 legislative amendments aim to strengthen foreclosure credibility and insolvency usability; sale of loans and securitization laws are expected to facilitate NPL sales. - Implement legal amendments effectively so they constitute a credible threat to non-repayment. - Target areas for policy: - Improve borrowers’ repayment capacity (especially low-income households). - Strengthen enforcement and foreclosure credibility to reduce strategic default incentives. - Continue accumulation of provisions and facilitation of loan sales to reduce NPLs on bank balance sheets, while seeking sustainable restructuring solutions given high re-restructuring and redefault rates. ### Banks, foreclosure/insolvency framework, and NPL workouts - Current situation: - Even after recent sale and transfer of banks’ NPLs, Cyprus still has one of the highest NPL ratios in Europe. - Recent legal amendments are expected to provide an improved framework to resolve NPLs by serving as a credible threat; implementation will be key. - Needed actions for effective NPL resolution: - Stronger collateral execution. - Durable NPL workouts. - Improved payment discipline. - Estia scheme: - Objective: encourage distressed borrowers to begin servicing their loans. - Caution: the scheme should avoid supporting strategic default by requiring a tight eligibility criteria and appropriate assessment of a borrower’s capacity to repay the restructured debt on a sustained basis. - Implication for banks: - Given still high levels of NPLs and the need for provisioning, bank profitability will remain under pressure. - Banks should continue to strengthen their balance sheets, diversify income sources, and improve cost-income ratios. ### Restoring credit financing: risks from high NPLs and high leverage - Effects: - High NPLs and high leverage raise concerns about prospects for credit financing and sustainability of growth. - Large NPLs pressure bank profitability through high provisioning needs which limit banks’ ability to extend credit. - Difficulties in collateral execution could lead to more risk averse banks, limiting credit supply and increasing borrowing costs. - Cost of financing in Cyprus remains among the highest in the euro area. - Over the past year, Cyprus has had the largest decline in credit-to-GDP ratio in the euro area. ### Sources of financing and recent credit-flow evidence - Bank credit and “pure new loans”: - Since 2017, bank credit has provided only a moderate amount of new financing. - Reduction in credit-to-GDP ratio has been almost entirely achieved by NPL write-offs and sale or transfer of loans out of the banking system, and through denominator effect (i.e., nominal GDP growth). - Pure new loans (excluding renegotiations) are about 15 percent of GDP as of 2017. - Two-thirds of pure new loans are provided to NFCs, especially in sectors substantially contributing to GDP growth. - Pure new loans to NFCs from 2017:Q3 to 2018:Q2 were €2.0 billion, unchanged from a year earlier. - Pure new loans to households from 2017:Q3 to 2018:Q2 were €1.2 billion, which had increased by about 20 percent from a year earlier. - Trends: - Transactional data show annual increase in pure new loans and accrued interests (net of repayments) have been marginally positive, compared to a peak increase of nearly 40 percent of GDP during the pre-crisis credit boom period. - Credit demand appears moderately strong in 2017, in line with robust economic growth, while credit supply remains broadly unchanged, reflecting continued risk averseness by banks. - Conclusion: While deleveraging is expected to continue through cleanup of bank balance sheets, growth in credit flows (pure new loans) is likely to remain at a moderate level until NPL recovery and repayment discipline improves significantly. ### Financing for growth industries and their sources - Growth industries contributing to GDP growth include construction, professional services, and real estate, though credit financing to these sectors remains limited. - Main sources of finance: - External financial inflows: - Net FDI inflow reached almost a quarter of GDP in 2017, increasing substantially from about 10 percent of GDP in 2016. - Assets under management by investment funds increased by about 7.5 percent of GDP, from about €3 billion (2016:Q2) to €4.5 billion (2017:Q2), with a notable increase in nonfinancial assets. - Households’ drawdown of savings and NFCs’ own funds: - Household saving rate has been around negative 4 percent of GDP for the past four years, as households draw down on their large stock of assets to finance consumption. - Corporate income tax collections have increased significantly over the past two years as corporate profits recover, suggesting NFCs have increased “own funds.” - Debt from non-bank financial institutions or nonresidents does not seem to contribute substantially to finance Cypriot activities. - Use of equity financing seems to be limited. ### Risks to financing and growth sustainability - Key risks: - In the absence of a recovery in new credit flows, current sources of financing may not be sufficient to sustain longer-term growth. - External financing risks include geopolitical shocks, maturing of the euro-area economic cycle, and abrupt tightening of financial conditions, which would adversely affect investment in the real estate sector. - High reliance on the Citizenship by Investment (CbI) scheme poses a risk for the construction sector. - Sustaining consumption growth through household “dis-savings” will become increasingly difficult, especially if repayment of loans improves. - While deleveraging is expected to continue as legacy NPLs are written down or worked out, it is important for new credit flows to recover as a financing source for faster economic growth. ### Policy implications and recommendations - Resolution of the NPL overhang would help restore the credit channel and contribute to sustainable longer-term growth. - By substantially reducing NPLs, the credit channel would be restored, serving as an additional and sustainable source of financing for more productive, creditworthy borrowers. - Key policy priorities: - Implement legal amendments effectively so they constitute a credible threat to non-repayment. - Improve collateral execution practices. - Ensure durable NPL workouts and stronger repayment discipline. - Design the Estia scheme with tight eligibility criteria and appropriate assessment of borrowers’ capacity to repay. - Banks to strengthen balance sheets, diversify income sources, and improve cost-income ratios to withstand provisioning pressures and support credit supply recovery. *Source: cr18338 (IMF).* ### References ______________________________________________________________________________ 15 ### References ______________________________________________________________________________ 15 ### A. Background - A key economic challenge in Cyprus is the large stock of non-performing loans (NPLs). - The paper discusses recent trends in the evolution of NPLs and identifies key challenges in reducing NPLs. - The paper examines main sources of financing underlying the recovery and whether they can sustain longer-term growth given the need for deleveraging. ### B. Evolution of NPLs - NPLs remain very large at 39 percent of total loans (second-highest in euro area) or 85 percent of GDP (the highest in euro area), as of Q2:2018, although declining. - Small borrowers (households and micro, small and medium-sized enterprises (SMEs)) owe more than 90 percent of the NPLs. - NFC NPL sectoral composition (amounts and shares): - Tourism and trade: €2.3 billion, 36 percent of NFC NPLs. - Construction: €1.8 billion, 28 percent. - Real estate: €0.9 billion, 14 percent. - About one-half of NPLs relate to terminated accounts (outstanding balance has been called in); about one-third of NPLs have been restructured. - Historical path: - NPLs increased from 13 percent of total loans (or 64 percent of GDP) in 2010 to 48 percent of total loans (or 161 percent of GDP) in 2014 (peak year). - Since the 2014 peak, NPLs declined to 39 percent of total loans (or 85 percent of GDP) by 2018:H1. - More than two-thirds of the NPL reduction was made by NFCs; reduction by households has been more limited. - Much household NPLs reflect housing loans or loans collateralized by primary residences. - Legislative and institutional developments: - Legislative reform on sale of loans, foreclosure, and insolvency were undertaken during 2014–15, but use of foreclosure was limited due to uncertainty on legacy cases, unpopular auctions and protests, and potential court delays from challenges and appeals. - Personal repayment plans (PRPs) introduced in the 2015 insolvency reform have been rarely used. - Sale of NPL portfolios was limited until recently. - 2018 amendments addressed shortcomings: clarified applicability to legacy cases; allowed electronic auctions; facilitated auction process. - New sale of loans law allows creditors to break down the mortgage in multiple pieces and gives buyers increased access to data; securitization law was approved. - NPL flows (Q3:2017–Q2:2018; stock at beginning normalized to 100): - Outflow: 45.4 (of which write-offs about one-third, sale of loans about one-third, migration to performing category 20 percent, NPL cash repayment 10 percent, debt-to-asset or equity swaps 6 percent). - Inflow: 17.5. - Net outflow: 27.9. - Specific flow components (billions of euro, period up to June 2018): write-offs 15.6; debt instruments held for sale 13.6; migration into performing 8.7; NPL cash repayment 4.8; debt-to-asset/equity swaps 2.7; one-time interest gross-up (due to IFRS9) 3.9; interest accrued on NPLs 4.5; migration from performing 9.0. - Other developments: - Bulk of NPLs previously owned by the Cyprus Cooperative Bank (CCB) moved out of the banking sector in 2018:Q3 to a newly created state-owned asset management company. - Outflows by cash repayments or migration into performing category have not substantially accelerated despite GDP growth above 4 percent annually since 2016 and a strong recovery in employment. - Sustainable restructuring is challenging: almost two-thirds of restructuring flow is on loans already restructured at least once; redefault rate on loans restructured one year before increased in 2018:Q2. - Loan loss provisions at Cypriot banks are close to 50 percent of NPLs, slightly above the EU average, as of 2018:H1; provision ratio has increased steadily since 2014. - ECB data indicates provisioning and collateral coverage is close to 100 percent of NPLs. - Accumulation of provisions has facilitated sale of NPLs by banks. ### C. Key Challenges to Reducing Household Sector NPLs - Overview: - Section uses Household Finance and Consumption Survey (HFCS) data to assess household repayment capacity and potential strategic behavior. - Low repayment capacity — HFCS and balance-sheet indicators: - Median net wealth in Cypriot households decreased by 36 percent between “Wave 1” (2009–10) and “Wave 2” (2014) of the HFCS; euro-area average change was 4 percent. - Real assets decreased by 30 percent; financial assets decreased by 29 percent; liabilities increased by 26 percent; gross income decreased by 30 percent. - Debt-to-income ratio increased from 1.57 to 2.51 (euro-area average 0.72). - Debt-service-to-income ratio for indebted households is 36 percent (euro area 14 percent). - Debt burdens especially heavy for households in bottom-20-percent income or wealth level: debt-service-to-income ratio for lowest-20-percent income level is over 140 percent (euro area 25 percent). - Nonfinancial private sector’s debt service ratio remains relatively high at 20 percent of GDP, as of 2018:H1. - Household HFCS medians (thousands of euros): - Real assets: Wave 1 314; Wave 2 218; Change -30. - Household main residence: Wave 1 240; Wave 2 200; Change -17. - Financial assets: Wave 1 221; Wave 2 16; Change -29. - Deposits: Wave 1 16; Wave 2 12. - Voluntary pensions and life insurance: Wave 1 16; Wave 2 10; Change -38. - Liabilities: Wave 1 60; Wave 2 76; Change 26. - Mortgage debt: Wave 1 87; Wave 2 100; Change 15. - Net wealth: Wave 1 267; Wave 2 170; Change -36. - Gross income: Wave 1 322; Wave 2 3; Change -30. [Note: HFCS table as supplied] - Net wealth of households, medians (thousand euros): Cyprus Wave 1 267; Wave 2 170; Change -36; Euro area Wave 1 108; Wave 2 104; Change -4. - Financial burden indicators, medians: - Debt-to-income ratio: Cyprus Wave 1 1.57; Wave 2 2.51; Euro area 0.63; 0.72. - Debt-service-to-income ratio: Cyprus Wave 1 0.23; Wave 2 0.36; Euro area 0.14; 0.14. - Mortgage-debt-service-to-income ratio: Cyprus Wave 1 0.25; Wave 2 0.34; Euro area 0.16; 0.16. - Debt-to-asset ratio: Cyprus Wave 1 0.17; Wave 2 0.23; Euro area 0.22; 0.26. - Loan-to-value ratio of main residence: Cyprus Wave 1 0.32; Wave 2 0.42; Euro area 0.38; 0.44. - Weak repayment discipline and strategic behavior: - Aggregate financial position: Cypriot households own financial assets exceeding liabilities by 100 percent of GDP, as of 2018:H1. - HFCS indicates median household net wealth in Cyprus about €170,000, exceeding euro area average €104,000 (as of 2013). - Outstanding loans by a median Cypriot household are 23 percent of total assets, lower than euro-area level of 26 percent. - For bottom 20 percent households, net wealth levels are similar between Cyprus and the euro area. - Fraction of households with negative net wealth was 6.9 percent in Cyprus; euro-area level 5.2 percent. - A sizable share of NPLs, particularly among wealthier debtors, could likely be serviced through disposal of assets—suggesting strategic default behavior given weak enforcement and non-credible foreclosure threat to date. - Average time to foreclosure is long (chart comparison noted); weak claims enforcement reduces credibility of foreclosure threat. ### D. Policy Implications - Addressing NPLs to lower borrowing costs and reviving credit supply will be important for supporting longer-term growth. - 2018 legislative amendments aim to strengthen foreclosure credibility and insolvency usability; sale of loans and securitization laws are expected to facilitate NPL sales. - Because repayments and migrations to performing status have not accelerated materially despite strong GDP growth and employment recovery, policies should target both: - Improving borrowers’ repayment capacity (especially low-income households). - Strengthening enforcement and foreclosure credibility to reduce strategic default incentives. - Continued accumulation of provisions and facilitation of loan sales can reduce NPLs on bank balance sheets, but sustainable restructuring solutions remain necessary given high re-restructuring and redefault rates. *International Monetary Fund, Cyprus: Challenges in Reducing NPL Overhang and Restoring Credit Financing (November 8, 2018).* ### 14. Banks should utilize the foreclosure and insolvency framework more actively to ### 14. Banks should utilize the foreclosure and insolvency framework more actively to ### Banks, foreclosure/insolvency framework, and NPL workouts - Even after the recent sale and transfer of banks’ NPLs, Cyprus still has one of the highest NPL ratios in Europe. - Recent legal amendments are expected to provide an improved framework to resolve NPLs by serving as a credible threat; implementation will be key. - Needed actions for effective NPL resolution: - Stronger collateral execution. - Durable NPL workouts. - Improved payment discipline. - Proposed Estia scheme objective and cautions: - Objective: encourage distressed borrowers to begin servicing their loans. - Caution: the scheme should avoid supporting strategic default by requiring a tight eligibility criteria and appropriate assessment of a borrower’s capacity to repay the restructured debt on a sustained basis. - Implication for banks: - Given still high levels of NPLs and the need for provisioning, bank profitability will remain under pressure. - Banks should continue to strengthen their balance sheets, diversify income sources, and improve cost-income ratios. ### Restoring credit financing: risks from high NPLs and high leverage - High level of NPLs in the banking system and high leverage in the economy raise concerns about the prospect for credit financing and sustainability of growth. - Large NPLs pressure bank profitability through high provisioning needs which limit banks’ ability to extend credit. - Difficulties in collateral execution could lead to more risk averse banks, limiting credit supply and increasing borrowing costs. - Cost of financing in Cyprus remains among the highest in the euro area. - Over the past year, Cyprus has had the largest decline in credit-to -GDP ratio in the euro area. ### Sources of financing and recent credit-flow evidence - Since 2017, bank credit has provided only a moderate amount of new financing. - The reduction in credit-to -GDP ratio has been almost entirely achieved by NPL write-offs and sale or transfer of loans out of the banking system, and through denominator effect (i.e., nominal GDP growth). - “Pure new loans” and recent magnitudes: - Pure new loans (excluding renegotiations) are about 15 percent of GDP as of 2017. - Two-thirds of pure new loans are provided to NFCs, especially in sectors substantially contributing to GDP growth. - Pure new loans to NFCs from 2017:Q3 to 2018:Q2 were €2.0 billion, unchanged from a year earlier. - Pure new loans to households from 2017:Q3 to 2018:Q2 were €1.2 billion, which had increased by about 20 percent from a year earlier. - Transactional data show annual increase in pure new loans and accrued interests (net of repayments) have been marginally positive, compared to a peak increase of nearly 40 percent of GDP during the pre-crisis credit boom period. - Credit demand appears moderately strong in 2017, in line with robust economic growth, while credit supply remains broadly unchanged, reflecting continued risk averseness by banks. - Conclusion: While deleveraging is expected to continue through cleanup of bank balance sheets, growth in credit flows (pure new loans) is likely to remain at a moderate level until NPL recovery and repayment discipline improves significantly. ### Financing for growth industries and their sources - Growth industries (construction, professional services, real estate) are contributing substantially to GDP growth though credit financing to these sectors remains limited. - Main sources of finance for these sectors: - External financial inflows: - Net FDI inflow reached almost a quarter of GDP in 2017, increasing substantially from about 10 percent of GDP in 2016. - Assets under management by investment funds increased by about 7.5 percent of GDP, from about €3 billion (2016:Q2) to €4.5 billion (2017:Q2), with a notable increase in nonfinancial assets. - Households’ drawdown of savings and NFCs’ own funds: - Household saving rate has been around negative 4 percent of GDP for the past four years, as households draw down on their large stock of assets to finance consumption. - Corporate income tax collections have increased significantly over the past two years as corporate profits recover, suggesting NFCs have increased “own funds.” - Debt from non-bank financial institutions or nonresidents does not seem to contribute substantially to finance Cypriot activities. - Use of equity financing seems to be limited. ### Risks to financing and growth sustainability - In the absence of a recovery in new credit flows, current sources of financing may not be sufficient to sustain longer-term growth. - External financing risks include geopolitical shocks, maturing of the euro-area economic cycle, and abrupt tightening of financial conditions, which would adversely affect investment in the real estate sector. - High reliance on the Citizenship by Investment (CbI) scheme poses a risk for the construction sector. - Sustaining consumption growth through household “dis-savings” will become increasingly difficult, especially if repayment of loans improves. - While deleveraging is expected to continue as legacy NPLs are written down or worked out, it is important for new credit flows to recover as a financing source for faster economic growth. ### Policy implications and recommendations - Resolution of the NPL overhang would help restore the credit channel and contribute to sustainable longer-term growth. - By substantially reducing NPLs, the credit channel would be restored, serving as an additional and sustainable source of financing for more productive, creditworthy borrowers. - Key policy priorities: - Implement legal amendments effectively so they constitute a credible threat to non-repayment. - Improve collateral execution practices. - Ensure durable NPL workouts and stronger repayment discipline. - Design the Estia scheme with tight eligibility criteria and appropriate assessment of borrowers’ capacity to repay. - Banks to strengthen balance sheets, diversify income sources, and improve cost-income ratios to withstand provisioning pressures and support credit supply recovery. *Source: cr18338 (IMF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18338.pdf_