The Economy Will Be Supported by Loans: The Bank of Latvia Explained How to Increase the Debts of People and Enterprises 0 23

“The growth of lending this year is almost 15% compared to last year (the loan portfolio of enterprises has increased by 18.6% this year, while household loans have grown by 8.9%. – editor). This means that lending has become the locomotive of the economy — it is driving the economy forward, creating opportunities to improve the quality of life for residents and contributing to business growth,” said Kazaks, emphasizing that the main task now is to ensure the sustainability of this upturn and its preservation.

He noted that 2023 has become a turning point after a long period of too weak lending in Latvia. In 2023, lending finally began to grow faster than the economy and started to contribute to its development.

“The volume of loans as a percentage of GDP has increased, but it is still significantly lower than the average level in Europe,” said Kazaks, adding that greater growth is possible in the future, but the question remains — how to achieve it.

He emphasized that some proposals have already been implemented, which contributed to the growth of lending, but many measures still need to be introduced.

The President of the Bank of Latvia also named four factors that contributed to the growth of lending.

Not Giving or Not Taking?

First, the financial condition of enterprises is no longer an insurmountable obstacle. Kazaks reminded that after the global financial crisis and the burst financial bubble in Latvia, every fifth loan was overdue by more than 90 days. Now, however, the share of overdue loans in bank portfolios is one of the lowest in the EU.

In numerical terms, during the peak of the crisis in 2010-2012, every fifth debtor could not repay with Latvian banks, while now it is only every fiftieth.

“Despite all the crises we have experienced — Covid-19, Russia's invasion of Ukraine, high inflation — the quality of the loan portfolio remains very high,” Kazaks proudly stated, adding that the ability of companies to borrow money has significantly improved on average.

Lowering Rates

Secondly, interest rates on loans are decreasing, although they remain above the average in the Eurozone. A similar situation exists in other Baltic countries.

“It may seem that 1–2% is a little, but if a large loan is taken, it is very significant,” said Kazaks, noting that in Latvia there has historically been a perception that high rates are the norm. One of the ways to change the situation has been the initiative for refinancing households. Over four years, the average additional interest rate has decreased from 2.5% to 1.5%.

In enterprise lending, according to Kazaks, no significant changes in additional rates are currently observed. “The fee for early repayment or refinancing is 1.5–2%. Such a high threshold limits competition because it is difficult for enterprises to refinance,” he said, adding that a rate of 0.1% is currently being proposed, but discussions are ongoing.

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Thirdly, mutual trust between banks and clients plays an important role. After a major overhaul of the banking sector, bankers became cautious, but now they have become bolder. Moreover, the financial situation of borrowers has significantly improved.

At the same time, the majority of enterprises that need financing do not apply for loans. According to surveys by the Bank of Latvia, more than half (51%) of such companies did not approach banks. The main reasons are overly strict collateral requirements, excessively high interest rates, and the need for personal guarantees.

Kazaks admitted that in 2024, for a third of the loans issued, the value of collateral was at least twice the loan amount. In Latvia, the average value of collateral is 160% of the loan, while in the Eurozone it is on average 28%. Additionally, a third of loans are secured by personal guarantees of individuals.

Overall, it turns out that Latvian commercial banks have turned into pawnshops.

Something needs to be done about this. Kazaks solemnly added that the Bank of Latvia, together with the industry and ministries, will seek solutions to reduce such a high level of requirements.

A Sacred Place Can Be Empty

Fourthly, a diverse financial sector is necessary. Although progress is noticeable, development is still required, and different market participants are needed.

He explained that the role of banks in Latvia and Europe is very large and important, but there is a group of market participants whose role could be more significant. For example, since October, credit cooperatives have been allowed to lend to legal entities. A regional housing loan program, Altum, has been introduced, and a license for small banks will soon be available.

However, much is still lacking, noted Kazaks. Among other things, Latvia lacks credit brokers that would allow easy comparison of offers, and there is no mechanism for the securitization of loans.

Securitization of loans is a financial process in which banks or other lenders pool issued loans into one “pool” and turn them into securities. These securities are then sold to investors. As a result, the bank's money is freed up — when the bank sells part of its loans to investors, it receives money back and can issue new loans.

...It is worth adding that in recent years several banks have closed in Latvia (Baltic International Bank, ABLV Bank, PNB, Danske Bank). And today, Kazaks is surprised — there is no one to work in the market, and those who still work give out loans very cautiously. Yes, even opening a simple account in the frightened Latvian banks is sometimes difficult.

Political Economy

Prime Minister Evika Silina attended the bankers' conference and reported that lending in Latvia is lower than the average in Europe.

To the best of her abilities, the Prime Minister promoted bank loans: "Lending contributes to the growth of enterprises, helps people buy homes, creates new jobs, and increases welfare."

Taking the opportunity, Silina admonished the banks (those that have not yet closed). In her opinion, the development of lending is not only the government's task. It is important for banks to participate more actively.

"The joint work of the government, the Bank of Latvia, and the financial sector, as well as the involvement of enterprises and consideration of societal needs, have allowed us to achieve positive results," Silina promised and went off to save the crumbling government.

Don’t Look Down on Interest Rates

A reduction in the mortgage interest rate by just 1 percent allows for the same loan amount:

• to purchase a new apartment that is 6 square meters larger.

• to gain an additional 18 square meters in a standard apartment.