Latvia's banks say they are ready to lend but people not ready to borrow

The Association of Latvian Commercial Banks’ (ALCB) on June 1 published its Lending Index, which recorded "rapid growth of lending in the private sector over the last three years." 

However, according to ALCB the Lending Index demonstrates that people are cautious and the ability to borrow in the private sector in general is higher than the desire to do so.

“The overall financial standing of the population of Latvia has improved, and as a result, banks’ readiness to lend is constantly growing. Banks’ ability and desire to lend is high," said Sanda Liepina, the Chairwoman of the Board at ALCB.

"The volume of the loans issued is mostly connected to clients’ desire and ability to borrow. It should be kept in mind that the share of the informal economy in Latvia is 22% of GDP, and this negatively impacts the ability to borrow, hindering faster development, especially in the private sector,” saidLiepina.

She added that despite the current low levels of take-up among potential borrowers more people are considering buying or building a house, in part influenced positively by governmental support programs, and this might be expected to fuel future demand for credit.

According to the ALCB's Index newest data, lending in the private sector shows stable growth. In 2017, growth was faster than the previous year, reaching 104 percent and marking a 4 percentage point improvement in the lending climate in the private sector, which has been the sharpest increase during the last three years. In comparison with 2016, index results in 2017 show steeper increase in people's ability to borrow (+8 percent). However, the desire to borrow has grown not as fast (+2 percent).

The Index shows that the willingness of commercial banks to lend to private customers has grown by 11% in the past year with a decrease in credit refusals.

"Although being employed in the informal economy is still the most common obstacle to borrowing, the number of people with a stable and transparent income, and who are ready to take on credit obligations, is always growing. Payback indicators are very good too, and banks take all these factors into consideration when adjusting their loan offers to the current situation,” said Ainars Balcers, co-chair of the ALCB Lending Committee.

The ALCB’s Lending Index measures both Latvian customers willingness and ability to borrow, and the willingness and ability of banks to lend. Fourteen different measurements are taken into account, including payment delays, changes in unemployment, proportional share of the informal economy, financial data from the banking sector, and consumer sentiment.

It should be noted that the most recent data covers 2017, before the current scandals in the banking sector hit in February this year. What impact the resulting and ongoing reforms in the banking sector will have on lending remain to be seen.

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