In the second quarter of 2023, the Central Bank of Cyprus (CBC) reported in its Bank Lending Survey that lending criteria for businesses and households remained tight, mirroring the previous quarter's levels. This consistency underscores banks' cautious approach amidst the current economic climate. Furthermore, a significant drop in loan demand was noted, driven by high interest rates and a dip in consumer confidence.

Specifically, banks maintained stringent lending standards for businesses and all household loan categories without any change from the previous quarter. This cautious stance is part of their strategy to limit the risk of non-performing loans while also focusing on sustainable loan renegotiations when needed. The intent is to balance risk mitigation with maintaining robust loan portfolios.

Interestingly, the terms and conditions for granting new business loans tightened, particularly for higher-risk loans. This was reflected in increased margins by banks for these loans. Conversely, margins for standard loans saw a net decrease. Despite these shifts, competition among banks helped prevent a more extensive tightening of overall loan terms for businesses.

Regarding housing loans, the overall terms and conditions, including banks' margins for ordinary loans, remained stable.

The reduced demand for loans was a key theme in the second quarter of 2023. Both business and household sectors in Cyprus reported a net decrease in loan demand. For businesses, this downturn was primarily linked to elevated interest rates and a lesser need for fixed investment financing. Despite the high costs of energy and raw materials, there was an uptick in demand for working capital and inventory financing.

In the household sector, the reduced demand for housing loans was less steep than in the previous five quarters, with high interest rates and faltering consumer confidence being major factors.

Looking ahead to the third quarter of 2023, banks anticipate unchanged lending criteria for business loans but expect tighter standards for all household loan categories. Loan demand is also predicted to further decline across all sectors. The CBC emphasizes that these survey findings represent the opinions and projections of participating banks, not necessarily mirroring the CBC’s own views or expectations.