Latvian borrowing capacity grew last year

The increase in average wages last year has boosted the ability of Latvian residents to borrow, but high base rates and rising spending have made many cautious, representatives of the Finance Latvia Association told LETA on May 20, citing data from the 2024 Lending Index.

The volume of newly issued loans fell by around 15% last year. Demand for loans in Rīga and the Pierīga region still dominates. Approximately 76% of housing loans were issued in the capital and its immediate surroundings, while the remaining 24% were in the regions and regional cities of Latvia.

Ainars Balcers, co-chair of the Lending Committee of the Finance Latvia Association and Head of Mortgage Lending Support in Baltics at Swedbank, points out that there are good reasons for the overall growth in lending: inflation is falling, wages are rising, and purchasing power is returning, the labor market is stable, and with the lifting of the ban on credit advertising, banks have become more visible with home lending offers, especially green lending initiatives.

The lending index rose to 130 points last year from 125 points in 2022. Balcers said that the index is on a positive trend, banks are able to lend, but the potential for businesses to borrow is higher than businesses are currently borrowing.

The ability of banks to lend has increased slightly over the last year, with the index reaching 162 points last year from 159 in 2022. Balcer explained that this was driven by an increase in the availability of free funds in banks, as well as a low level of loan defaults.

Meanwhile, banks' willingness to lend has increased faster and reached 108 index points last year, compared to 2022, when banks' willingness to lend was assessed at 96 points. Balcer explained that banks' risk appetite has not changed, while the return on capital last year was above the EU average. However, the high level of the shadow economy remains a disincentive.

Borrowers' willingness to borrow fell from 112 in 2022 to 110 last year. Balcers said that the volume of loans issued did not increase last year, and the number of new loan increases also decreased. Several sectors also faced challenges, in particular agriculture and forestry.

Borrowers' ability to borrow reached 141 index points in 2023 compared to 131 in 2022. This was driven by a reduction in tax arrears, continued growth in gross domestic product, an increase in average monthly wages, as well as an increase in capital accumulation by companies, Balcers said.

The Finance Latvia Association's Lending Index is a composite measure of the public's ability and willingness to borrow, as well as the banking sector's ability and willingness to lend.

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