The Central Bank of Cyprus ("CBC") has recently issued a Directive (Directive on Arrears Management of 2013) under section 41 of the Banking Laws of 1997 to 2013 regarding arrears management and restructuring of bank customers' debts.

The Directive applies to all credit institutions licensed by the CBC and to all branches of credit institutions of other member states operating in Cyprus, unless they are covered by corresponding provisions enacted in their home member state. It refers to institutions within its scope as authorised credit institutions ("ACIs").

The Directive aims to ensure that all ACIs operate efficient and effective strategies, policies, structures, procedures and mechanisms to manage arrears and, where necessary, to achieve fair and sustainable restructurings of credit facilities of borrowers facing financial difficulties, whether individual or corporate.

It requires all ACIs to develop a strategy on arrears management in accordance with the framework set out in the appendix to the Directive covering the institution's policy on arrears management for every category of credit facilities, the appropriate governance structures and control mechanisms and the available restructuring options. Every ACI is required to establish and operate an independent centralised department responsible for the effective monitoring of arrears and for the restructuring of credit facilities of borrowers in financial difficulties.

ACIs are also required to establish an independent internal appeals process for appeals submitted by borrowers, and to publish details of the appeal process on their website and communicate them to the borrower at the beginning of any restructuring process. As part of this process they must establish an appeals committee that is independent of the credit granting, monitoring and restructuring functions and that is charged with reaching a reasonable compromise between the borrower and the institution wherever possible.

The Directive also contains a Code of Conduct setting out the prescribed minimum standards to be observed by ACIs when dealing with borrowers and guarantors of their debts. The Code of Conduct on the Handling of Borrowers in Financial Difficulties of 2013 ("the Code") is intended to support and facilitate a meaningful interaction between ACIs on the one hand and obligors on the other, with the ultimate goal of achieving a fair and sustainable restructuring. It sets out the responsibilities of ACIs in the arrears management process and makes a clear distinction between cooperative and non-cooperative obligors, with the focus on consensual and voluntary restructuring.

The Code sets out in detail lenders' responsibilities in each of the six main phases of the restructuring process, namely:

  • Initial communication with the borrower
  • Obtaining financial and other information
  • Assessment of the borrower's financial position
  • Assessment of suitable restructuring options
  • Presentation of restructuring proposals to the borrower
  • Appeals

The Code requires ACIs to make all reasonable efforts to work with borrowers to obtain all the financial and other information required to make a proper assessment of borrowers' ability to meet their commitments and, based on this information, to attempt to formulate realistic and fair restructuring proposals. ACIs are required to implement a pricing policy which maintains a proper balance between the interests of the institution and its customers, so as to align interest and other charges with borrowers' repayment capacity as far as possible.

The CBC considers the issue of arrears management and restructuring to be of paramount importance in its goal of ensuring financial stability, since it forms the primary means of improving the quality and recoverability of ACIs' asset portfolios.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.