The basic principle when assessing the granting of new credit facilities and when reviewing a credit facility is the determination of the repayment capacity of the borrower, Central Bank says in its new direction on granting loans.
The value of collateral is not a decisive factor in the credit institutions` (CI) assessment of an application for a credit facility, it adds. Collateral may only serve as a secondary source of repayment and must be assessed as such, the Bank explains.
Collateral by itself must not under any circumstance be a criterion for the approval of a credit facility and cannot by itself justify the approval of any credit facility. Collateral must only be considered as the CI’s second way out in case of default and not as the primary source of repayment.
Should personal guarantees be obtained, the credit institutions must inform the potential guarantors that their responsibilities emanating under their guarantee are exactly the same as those of the borrower, the CB directive notes. This information must be given along with the information required according to The Protection of a Specific Category of Guarantors Law of 2003 to 2015.
In the case of legal entities, credit institutions may request information such as audited financial accounts for the last three financial years, financial accounts as at the end of the relevant quarter of the current year for listed legal entities, management accounts, as at the end of the relevant quarter of the current year for non-listed legal entities, original of income tax clearance for the last two years, as well as a copy of Value Added Tax (VAT) statements submitted since last balance sheet date, if registered.
The CB directive also says that banks may also request a business plan with budgeted cash flows for the life of the project financed, if applicable, and at least for the next two years for other cases, in all cases based on reasonable assumptions, including likely and stress scenarios, verified by accountants / auditors, as well as details of projected income to be generated by the use of the requested Loan, if applicable.
ENDS, CYPRUS NEWS AGENCY