Blog: Snapshot: regulation of bank loan facilities in Cyprus – Lexology

Regulation

Capital and liquidity requirements

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

The capital adequacy framework for credit institutions comprises the Capital Requirements Regulation (575/2013) (CRR), which is directly applicable in Cyprus, and the Capital Requirements Directive IV Directive (2013/36/EU) (CRD IV) and Directive 2014/59/EU on Bank Recovery and Resolution (BRRD), which have been transposed into Cypriot law. 

The prudential framework set out in the CRR and the CRD IV implements the standards set by the Basel Commission on Banking Supervision. A substantial body of implementing legal instruments on technical standards and guidelines is in place.

 

The CRR provides for two liquidity ratios:

  • liquidity coverage ratio (LCR), which measures whether a bank holds an adequate level of unencumbered, high-quality liquid assets (HQLA) to meet net cash outflows under a stress scenario lasting for 30 days. Except in crisis situations, firms must maintain an LCR of at least 100 per cent (that is, the firm’s liquidity buffer should at least equal total net liquidity outflows over the stress period); and
  • net stable funding ratio (NSFR), which measures whether a bank maintains an acceptable amount of stable funding based on the liquidity characteristics of the firm’s assets and activities over one year. Under the NSFR, banks are subject to a general requirement to ensure that long-term obligations are adequately met with a diversity of stable funding requirements under both normal and stressed conditions.

 

Under the relevant directive of the Central Bank of Cyprus, the basic principle applicable to the assessment of whether lending will be granted is the determination of the repayment capacity of the borrower.  The value of collateral should not be a decisive factor in the assessment of an application for a credit facility and collateral may only serve as a secondary source of repayment. Banks must ensure that the level of the borrower’s own contribution is satisfactory and reflects the level of risk of the credit facility.

Disclosure requirements

For public company debtors, are there disclosure requirements applicable to bank loan facilities?

Public listed companies are subject to disclosure requirements in their financial statements under the Cyprus Companies Law, Cap. 113, as amended. Cyprus public listed companies may also be required to disclose certain credit facilities, depending on the transparency framework applicable to these companies.

Use of loan proceeds

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

Bank loan proceeds must be applied for legitimate purposes and in accordance with the terms and conditions of their documentation.  Banks carry out full due diligence on the purpose and use of bank loan proceeds.

Cross-border lending

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

Cyprus implements UN and EU sanctions and restrictive measures.

The Law for the Implementation of the Provisions of the UN Security Council Resolutions (Sanctions) and the 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 institutions. Criminal liability may arise for parties infringing the legislation.

Banks are also required to apply the directive on sanctions issued by the Central Bank of Cyprus.  Under this directive, banks are required to maintain and implement a sanctions policy, setting out compliance and risk mitigation mechanisms.

Debtor’s leverage profile

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

When granting credit facilities, banks are required to assess the applicant’s financial position and, where applicable, financial indicators, for example, leverage ratio and cost to income ratio.

Interest rates

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

Interest rates in bank loans are liberalised, but the imposition of a default interest rate by more than two percentage points (2 per cent) is prohibited. The default rate is the rate computed on the amount of instalments of a loan which are in arrears.

Banks cannot capitalise interest more than twice a year and are required to transparently present the calculation method for the base rate to borrowers.

Interest rate limitations apply for non-bank loans. Usury is a criminal offence punishable on conviction with either or both imprisonment and a fine. Subject to certain exceptions, a person is prohibited from receiving, collecting or charging interest at a rate that is higher than the interest rate ceiling during the provision of any loan period. 

Currency restrictions

What limitations are there on investors funding bank loans in a currency other than the local currency?

There are no restrictions on the movement of capital (including with reference to countries outside the European Union), nor are there any exchange control restrictions. The CBC has issued directives on sensible liquidity in all currencies and local debtors are not restricted from borrowing in any foreign currency.

Other regulations

Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.

Loan sales

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

  • any credit facility contract, including, inter alia, loans and credit card overdrafts, from which amounts remain outstanding, irrespective of whether such facility was terminated or has expired; and
  • rights and obligations of a creditor against a primary debtor as these result from a civil court judgment in relation to a credit facility, provided amounts remain outstanding under such judgment.

 

Selling and acquiring loans can be carried out:

  • by credit acquiring companies authorised by the Central Bank of Cyprus;
  • authorised credit institutions in Cyprus;
  • credit institutions licensed and supervised by the competent authorities of an EU member state and entitled to establish a branch in Cyprus; and
  • financial institutions that are subsidiaries of credit institutions licensed in an EU member state and which provide services or carry out business in Cyprus through a branch in Cyprus.

 

Loan securitisation

Securitisation involves transactions that enable a lender or a creditor to refinance a set of loans, exposures or receivables, by transforming them into tradable securities accessible by investors.

Cyprus law accommodates the securitisation of credit facilities, receivables or exposures that originated from or were acquired by credit institutions, financial institutions or credit acquiring companies.

The applicable Cypriot framework on securitisations provides for:

  • the requirements for due diligence, risk-retention, transparency and credit-granting criteria;
  • the requirements for the sale of securitisations to retail clients;
  • a ban on resecuritisation;
  • rules for securitisation special purpose entities (SSPEs) and securitisation repositories;
  • a structure for simple, transparent and standardised (STS) securitisation;
  • a system for administrative sanctions and remedial measures in cases of non-compliance.

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