Finance Latvia Association Lending Index: the desire and ability of entrepreneurs to borrow funds is rapidly increasing
In the period between the Year 2015 and 2018, the ability and willingness of businesses to borrow funds has significantly increased, according to the Finance Latvia Association Lending Index of the business segment. During this period, the lending index for businesses has increased twice as fast than it has increased for individuals which shows that the global economic upswing has a positive impact on the Latvian economy. It is true that, just like residents of Latvia, companies are also cautiously optimistic in terms of borrowing funds, and the ability to borrow is generally higher than the willingness to borrow.
According to the latest data from the index developed by the Finance Latvia Association, lending in the business segment has continued to grow this year, rising from 107 points last year to 110 index points this year. However, growth has been slightly slower than in the year 2017. At the same time, entrepreneurs' ability and interest to borrow in the year 2018 has experienced the fastest rise so far, respectively allowing the index rates to rise up to 127 points (+14.6 index points) and 116.7 points (+9.7). The rapid increase of the creditworthiness and willingness of entrepreneurs to borrow has become such due to the overall economic development of the country as well as the increase in corporate profits, which is closely linked to the tax reform that was implemented at the beginning of the year. Furthermore, the state has taken measures in order to improve the legal environment that has also helped decrease the number of legal entities with insolvency issues leaving a positive impact on the situation.
“There are particularly favorable conditions in Latvia currently in order to develop business opportunities, as the country has a stable and growth-oriented economic situation, as well as a comprehensive offer of external financial support tools that are available for entrepreneurs. It is the right time to increase the pace of business development by not only utilizing individuals’ own resources but also those available via various public and private financial support resources. Unfortunately, this opportunity for growth is used rarely. There could be various reasons for this kind of caution – in some cases this is caused by the chosen business management strategy, sometimes it is a lack of awareness and understanding in terms of which financial support tool is the most appropriate for the particular stage business is at, but sometimes it is the financial wellbeing of the businesses. It should be noted that the shadow economy continues to be an obstacle in order to successfully attract external financing, but more and more companies are able to make commitments due to good business practices, stable revenue streams and transparent source of funds," explains Santa Purgaile, co-chair of the Finance Latvia Association's Lending Committee and Member of the Board of Citadele Bank.
According to the Finance Latvia Association lending index of the business segment, in the year 2018, changes are also observed in the financial sector. The ability of commercial banks to give out loans to businesses this year has shrunk by 5.4 index points, but the desire - by 7 points. The situation has been influenced by the growth of the shadow economy in the country, as well as changes in the regulations within the banking industry, both at the European and national level, which stipulate even more stringent conditions and requirements for banks. It is true that the largest commercial banks in Latvia have not decreased their ability to lend to businesses as rapidly as this sector in general. This confirms that a significant impact has been left on the overall banking sector situation by the recently developed risk reduction policy and the decrease in non-resident deposits.
At the same time, in the the Citadele Index survey, local entrepreneurs have indicated that, according to their experience, banks' willingness to credit has not changed, but instead even increased: 38% of entrepreneurs have indicated that they have not changed, while 21% of entrepreneurs have acknowledged that bank loans have become more accessible within the last year. "These results demonstrate that local businesses feel less affected by risk mitigation efforts by the banks, and the loan availability is valued positively," says Santa Purgaile.
The Finance Latvia Association lending index of the business segment is a unique and complex measure that characterizes the ability and willingness of Latvian entrepreneurs to borrow funds, as well as the ability and willingness of the banking sector to lend. As a whole, 16 different indicators are analyzed, such as late payments, the number of insolvencies, the proportion of shadow economy, financial data of the banking sector, the mood of entrepreneurs, etc., thus providing a full picture of the complexity of lending as a driving force of the economy.
The Finance Latvia Association has developed the index in cooperation with a number of leading Latvian specialists in the field of economics and lending as well as analyzing the best international examples.