Latvia Has a Long Way Ahead in Credit Development 0 5

This year, the credit portfolio of enterprises has increased by 18.6%, while the volume of loans for households has grown by 8.9%. Overall, lending volumes in Latvia have increased by 15% compared to last year. However, even against the backdrop of these positive indicators, the country still has a long way to go to catch up with the lending volumes and related economic activity of its Baltic neighbors, not to mention the developed European countries.

In the Eurozone countries, the average volume of loans issued in the middle of this year was 73.4% of the gross domestic product (GDP), while in Latvia it was two and a half times lower at 30.1% of GDP. At the same time, the problem lies in how to make this growth sustainable rather than a short-term phenomenon. These issues were discussed by participants at the Bank of Latvia conference "How to Increase the Potential of Lending in Latvia?".

According to the central bank, the current growth in lending volumes has been supported by four factors. First, the financial condition of enterprises is no longer an insurmountable obstacle to obtaining loans. The President of the Bank of Latvia, Mārtiņš Kazaks, mentioned at the conference that after the global financial crisis and the burst financial bubble in Latvia in 2008-2009, the delinquency rate on nearly one in five loans was at least 90 days, while now the share of delinquencies in the credit portfolios of Latvian banks is among the lowest in the EU. Second, the growth in lending is supported by a decrease in interest rates on loans, although they are still higher than the average in the Eurozone.

A similar situation is observed in other Baltic countries.

"It may seem that 1-2% is insignificant, but when taking a loan for a fairly large amount, it is an important factor," noted Kazaks, adding that historically, there has been a perception in Latvia that high interest rates are the norm.

The initiative for refinancing households also contributes to the growth in lending volumes. Over four years, the average interest rate on mortgage loans has decreased from 2.5% to 1.5%. At the same time, in enterprise lending, according to Kazaks, significant changes in rates are not yet observed. One of the reasons is the high fee for early repayment or refinancing, which currently stands at about 1.5-2% of the remaining loan value.