By Laura Noonan and George Georgiopoulos
ATHENS (Reuters) - Greek banks are upping their game to contain a swell in delinquent loans that could threaten their viability.
But one senior banker admits that even after their best efforts, banks will have to cut debts owed by some businesses and households unable to recover from six years of recession.
"The debt load has to be revised ... we cannot refuse to do as a bank what we ask international creditors to do for Greece," one senior banker said, referring to losses bondholders accepted on Greece's own bonds in 2010 as part of a bailout.
Tens of billion of euros of non-performing loans present a major headache for Greece's four largest banks, since they will struggle to get full repayment on the loans.
The banks together received a 28 billion euros capital injection over the summer, including 25 billion euros from the state's bank bailout vehicle the Hellenic Financial Stability Fund (HFSF).
The latter now holds majority stakes in National Bank of Greece (ATH:ETE), Piraeus (ATH:TPEIR), Alpha Bank (ATH:ALPHA) and Eurobank (EURBr.AT).
Yet the adequacy of that capital injection is now being assessed in another round of stress tests to see if the four banks could withstand further economic and financial shocks.
A second senior Greek banker said he expected Greek non- performing loans (NPLs), which averaged 28 percent at the end of June, to peak in the "mid 30s" in 2014, before gradually falling.
Greek central bank governor George Provopoulos said NPLs are already increasing at a slower rate. "I expect NPLs to stabilize next year and gradually decline after that," he said.
Even before any rise in NPLs, Greek banks face a major challenge dealing with the bad loans already on their books.
The first Greek banker said there were particular challenges in small business lending, where it was common to see viable companies dragged down by debt because they would never again achieve the scale they had when they took out their loans.
"The debt load for some sectors is not appropriate given what happened," the banker said, adding that write-offs were inevitable.
It was too soon to talk about writing off household debt, he said, even though write-offs would ultimately be needed in some cases.
"This country has gone through an existential experience in the last year, it had a significant impact on borrower behaviour," he said. "We need to allow time for normality to work its way back into the sector."
Another area of concern among Greek bankers and policymakers is the issue of "selective default", where householders able to pay a mortgage choose not to, taking advantage of a law Greece introduced in 2010 banning foreclosures to protect homeowners.
Consultancy Blackrock (BLK.N) and accountants Ernst & Young (ERNY.UL) are carrying out a "troubled asset review" to find out how Greece's four largest lenders are dealing with non- performing loans.
Among the recommendations expected to be communicated to banks and published over the coming weeks is a common set of guidelines for dealing with NPLs, said George Koutsos, deputy chief executive of the Hellenic Financial Stability Fund (HFSF).
"We will try to offer our good services to encourage the banks to take a more pro-active approach on multi-banked borrowers," added HFSF Chairman Christos Sclavounis.
Bankers say they would welcome more consistent treatment of defaulters across the system and more co-ordination dealing with borrowers who have loans from several banks.
Meanwhile, Greek banks are changing to tackle the problem, with NBG and Piraeus hoping to set up "bad banks", where non-performing loans will be housed, by the end of the year to improve recoveries.
(Editing by Alexander Smith and David Holmes)