FRANKFURT, (Reuters) – Eurozone banks continue to see a fall in soured loans during the second quarter. This was despite the European Central Bank warning that lenders may be complacent about recognising bad credit.

The non-performing loans (NPLs) of the bloc’s 114 largest banks fell to 422 Billion Euros in the second quarter, down from 455 Billion three months prior. In quarterly data from the ECB, they also reported that the ratio for bad debt dropped to 2.32% instead of 2.54%.

Because of government guarantees and moratoria, bad debt levels have been surprisingly low during the pandemic. This is because banks and lenders were unwilling to force restructuring and they could meet technical requirements for servicing the debt.

But, the underlying performance in the corporate sector is now weaker and banks have been warned by the ECB that if the government takes away its measures, some borrowers may face difficulty paying their bills.

However, provision and impairment charges for the first half were still only a third of what they were last year. This was a significant boost to profits according to ECB data.

Greece held 14.8% of the non-performing loan market. However, that number fell more than half to 15.0% in the last year. Spain was the second weakest banking country in the bloc. The NPL rate in Spain actually increased a little from one year ago.