NICOSIA, Dec. 3 (Xinhua) -- The European Commission has approved an ambitious plan of the Cypriot government to reduce non-performing loans by helping debtors to repay their loans secured by their primary residence, a document released here on Monday said.
The document, released by the Directorate General for Competition, said that the plan is not contrary to the ban of state subsidies.
It added that though it provides for financial help to individuals, this help does not amount to subsidies, as these are confined to what is considered necessary to safeguard that loan owners will not lose the residence they live in.
Through the house plan, the government plans to subsidize by one third the interest and principal of an eligible borrower.
The Ministry of Finance, which prepared the plan, estimated that about 15,000 borrowers with loans amounting to 3.4 billion euros are eligible to participate in the plan under the criteria set out.
To be eligible, a borrower must own a house of a value not over 350,000 euros which secures the loan, and the family should not have an annual income of over 50,000 euros.
Under the plan, the banks will reduce the amount of a loan down to 350,000 and the state will pay one third of the monthly instalment to the bank, at a total cost of 33 million euros a year.
These concessions to the borrowers were justified by the need to reduce the high ratio of non-performing loans.
Almost six years after the peaking of the financial crisis that led to a 10-billion euro bailout of Cyprus and the resolution of the banking system in March, 2013, non-performing loans amount to 40 percent of the total loan portfolios of the banks.
The most recent data by the Central Bank of Cyprus showed that non-performing facilities stand at 20 billion euros, of which 10.7 billion euros are owned by households.
Reducing the household part on non-performing loans by about one third will lighten the burden of banks.
Cyprus Cooperative Bank, the eastern Mediterranean island's second largest lender, which had the largest ratio of non-performing loans owned mostly by households, was forced into orderly liquidation by the European Central Bank, after it could not raise 600 million in new capital.
The approval of the scheme by the European Commission came as the International Monetary Fund(IMF) released a report warning Cyprus that despite a brisk growth, its economy was at risk because of the high ratio of non-performing loans.
"The economic outlook could weaken if implementation of NPL resolution is delayed", the report released by the executive directors of IMF said.
They also referred to the house plan recommending that in order to avoid encouragement of strategic defaulters it should be better targeted and based on appropriate assessment of borrowers'capacity to repay.
The report by the IMF also predicted that the Cypriot economy is likely to grow by 4.2 percent this and next year, higher than Cypriot and EU estimates of a 4 per cent expansion for the same period.
The report was prepared after an IMF mission concluded an onsite inspection of the Cypriot economy on November 28.