Record number of bounced cheques as economy slows down.
A RECORD number of cheques totalling e1/42.1 million bounced in January and February, the Central Information Registry (CIR) has revealed.
The value of the dishonoured cheques for the first two months of 2009 already represents 37 per cent of the total for the whole of 2008, which was e1/45.6 million. The number of dishonoured cheques registered with the CIR in the first two months of this year represents 27 per cent of last year's total.
This sudden rise in the number of dishonoured cheques has coincided with a slowdown in the economy, reduced liquidity in the banking market and scarcer credit, phenomena which began to really bite in December. The value of dishonoured cheques over the last three months was up by 80 per cent, 76 per cent and 68 per cent per month respectively compared to the 2008 figures. The December figure alone was the highest year-on-year increase since the CIR started keeping records in 2003.
The Finance Ministry has been working closely with the Central Bank to try to improve banking liquidity since the effects of the global crisis started to appear in Cyprus. This approach, which is being followed by governments all over the world, is based on the monetarist theory, according to which the government and Central Bank inject liquidity into the banking market, interest rates come down, consumers spend more and so the economy starts growing faster.
The catch is that the banks have gratefully accepted the liquidity injections, but are still refusing to lower their lending rates. So consumer spending is unlikely to kick-start the economic recovery any time soon.
The latest statistics on dishonoured cheques highlight this weakness in the monetarist approach, as less money is circulating more slowly than ever. Andreas Matsis, Vice President-Commerce at the Cyprus Chamber of Commerce and Industry (KEVE) told the Cyprus Mail that companies have always tended to delay payment to their creditors, but this situation is getting much worse. "Supermarkets can sometimes take up to six months to pay their suppliers", he added.
But companies are also seeing their own debtors taking longer to pay up, while their own short-term obligations still need to be paid, so the vicious circle continues. Matsis believes that this situation could at least be eased if the banks were to increase overdraft limits and be more flexible with their commercial customers -- which brings us back to liquidityC*
An increasing number of retailers and supermarkets are severely restricting their acceptance of cheques, or even refusing to accept them altogether. To an outsider, it might appear odd that Cypriot retailers should accept a cheque at all without a cheque guarantee card. A senior source at Marfin Laiki Bank explained to the Cyprus Mail: "There was a proposal to introduce cheque guarantee cards in 1985, but that didn't fly. Cyprus has such a small business community that everybody knows each other, so it is relatively easy to judge informally whether someone is a credit risk."
He added: "We are seeing a downward trend in cheque use overall, with increasing use of the internet and Maestro/Switch cards to make payments." As for the recent sharp increase in dishonoured cheques, the Marfin Laiki source said this is most likely due to the writing of post-dated cheques rather than conscious attempts to defraud the drawee.
Matsis seemed to confirm this view, saying that although an increasing number of cheques are being returned unpaid by banks, a drawee will still present them once or twice more before finally considering reporting the drawer to the CIR.
The CIR implements the Joint Instructions of the Central Bank of Cyprus and the Commissioner for Co-operative Societies and Co-operative Development for the Opening and Operation of Current Accounts -- usually referred to simply as "the Instructions", which came into force on 1 Feb 2003 -- and records the details of issuers of dishonoured cheques on the official Register.
Getting on the Register, popularly known as the "black-list", is relatively easy. A person -- the legal term for an actual person or a company -- is recorded in the Registry if just one of three criteria is satisfied: a person has issued at least three dishonoured cheques over a period of 12 months, the combined total value of any dishonoured cheque(s) issued over this period exceeds e1/41,708, or there is a court decision against any person for an offence connected with the issue of dishonoured cheques.
The penalty for being listed is severe. As soon as they are informed of a listing on the CIR Register, all banks and banking co-ops must immediately freeze all current accounts in the name of that person and demand the return of all unused cheques within ten days. No bank or banking co-op is allowed to open a current account in the name of a person listed in the Registry for as long as the listing is in force.
Getting off the Register, however, is much more difficult. This is only possible if all three of the following conditions are satisfied: three years must elapse after being listed in the Registry, the listed person must be able to prove that all previously-registered dishonoured cheques have been honoured, and 12 months must have passed since the last dishonoured cheque was honoured.
However, the CIR's Managing Committee has the discretion to examine applications for de-registration of a listed person after a period of 12 months following the settlement of all registered dishonoured cheques, provided the settlement is supported by adequate evidence.
Copyright Cyprus Mail 2009
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