For years, discussion around non-performing loans (NPLs) in Cyprus has focused on the billions of euros transferred from banks to credit-acquiring companies. However, the picture of the banking system is not limited to legacy problem portfolios. The economy continues to generate new NPLs as households and businesses encounter financial difficulties, business failures and an inability to meet their obligations.
The objective, therefore, is not to eliminate problematic loans altogether, something that is unrealistic in a market economy, but to keep them at manageable levels and address them promptly so they do not evolve into long-term unresolved cases.
Below 2%
Figures from the Central Bank of Cyprus as at 31 July 2026 show that the stock of NPLs in the banking system has declined significantly.
The ratio of non-performing loans fell to 1.5%, from 1.6% in June. The NPL coverage ratio stood at 64.5%, compared with 64.9% the previous month.
According to detailed data from the Central Bank, the gross balance of loans and advances amounted to €52.93 billion, while NPLs stood at approximately €806.4 million.
That corresponds to roughly 1.52% of total lending, based on the methodology of the European Banking Authority, which includes loans to central banks and credit institutions.
This places the Cypriot banking system in a relatively favourable position by European standards. The European Banking Authority recorded an NPL ratio of 1.82% for banks in the EU and the European Economic Area in December 2025. The comparison is indicative, as it relates to different reporting periods.
The low ratio does not mean the problem has disappeared. Rather, it means the existing stock of problematic loans remains limited relative to the overall size of lending portfolios.
The critical question is whether banks can continue to manage loans that become problematic each year without allowing a new accumulation of arrears to emerge.
Households remain the most vulnerable
Analysis by borrower category reveals different sources of credit risk. Households account for the largest share of NPLs, while businesses continue to face challenges despite improvements in overall indicators.
Households account for approximately €458.5 million in NPLs, against total gross loans of €10.97 billion. The NPL ratio within this category stands at approximately 4.2%.
This underlines the importance of households' ability to service mortgage and other borrowing obligations, particularly when incomes, interest rates or the cost of living change.
Among non-financial corporations, NPLs amount to approximately €317.2 million, against total loans of €14.11 billion. The corresponding ratio is approximately 2.2%.
Although lower than the household ratio, the category is significant because a business's inability to service its debt can affect employees, suppliers and other enterprises.
Of particular importance are small and medium-sized enterprises (SMEs), a sub-category of non-financial corporations.
Their NPLs amount to approximately €308.3 million out of total loans of €8.85 billion, or around 3.5%.
This remains a significant ratio, highlighting that smaller businesses continue to be exposed to liquidity risks, fluctuations in demand and rising operating costs.
For other financial corporations, NPLs amount to approximately €30.8 million against loans of €2.88 billion, representing a ratio of around 1.1%.
Loans to the general government recorded no NPLs in the July data.
What is an acceptable level?
International supervisory practice does not set a single ideal NPL ratio for all banks.
Risk varies depending on portfolio composition, economic conditions, collateral, and the ability to recover outstanding debts.
One commonly cited benchmark is the 5% threshold used by the European Banking Authority as a trigger for enhanced management requirements and supervisory monitoring.
The Authority itself makes clear that this threshold is neither a target nor a definition of the optimal NPL level.
At approximately 1.5%, Cypriot banks are comfortably below this benchmark.
That does not guarantee that new bad debts will not emerge, but it does indicate that the existing stock no longer poses the same systemic threat it once represented.
Failure is part of the economy
The creation of NPLs is not, in itself, evidence of failure within the banking system.
In every economy, some businesses fail, while some households lose the ability to service their obligations.
The pursuit of zero NPLs could result in excessively restrictive lending policies, limiting access to financing even for viable business plans.
The challenge is to distinguish promptly between temporary financial difficulties and permanent inability to repay, and to apply appropriate solutions in each case.
Viable businesses require restructuring arrangements that allow them to continue operating. Where there is no realistic prospect of viability, a swift settlement of obligations is required so that neither the debtor nor the bank remains trapped for years.
The same principle applies to households. Closing a loan that cannot be repaid may ultimately be the wisest course of action.
The importance of insolvency and restructuring
This is where an effective insolvency and restructuring framework becomes critical.
The faster the process is completed, the greater the likelihood that an entrepreneur whose venture has failed can return to economic life, create new activity and once again put knowledge and experience to productive use.
At the same time, banks can recover part of their claims more quickly, reduce management costs and free up capital for new lending.
An economy that allows a swift and orderly exit from failure is also an economy that can finance the next entrepreneurial effort more boldly.
