ALCB Lending Index: Banks' Desire to Lend and Customers' Ability to Borrow is Growing
Over the past year, the ability and desire of Latvia’s businesses and private individuals to borrow, and the inclination of banks to lend has rapidly increased. This is confirmed by the lending index developed by the Association of Latvian Commercial Banks (ALCB), which is the first all-encompassing measure in Latvia of the interaction between lending growth trends and Latvia’s economic situation.
The ALCB index, which spans and analyses 16 different indicators, integrates the most significant dimensions related to the process and volume of lending, i.e. the most important indicators regarding the interaction between lending supply and demand and banks’ desire and ability to lend, as well as borrowers’ desire and ability to take out loans. Compared with previous years, the index’s results in 2017 show stable growth, in particular reflecting the growing desire of the part of banks to lend (+13%), and the ability (+7%) and desire (+8%) of borrowers to take out loans. However, banks’ ability to lend has fallen slightly (-5%), because of structural changes within the sector.
“Lending is a measure of the country’s economic growth. Therefore, its volume and availability is directly correlated to the policies implemented by the Government, the development of the business climate, as well as the welfare of the population and the culture its citizens in meeting their obligations. The result of the index allows one to forecast that during the next few years lending volumes will continue to grow steadily. The banking sector will continue to provide responsible and supervised lending, facilitating the sustainable growth of the economy. In addition, the sector will offer new and innovative services not only to existing customers, but also to businesses in the new economy. However, in order for growth to accelerate, the most significant problem, i.e. the shadow economy, must be resolved,” argues ALCB Chair Sanda Liepiņa.
In recent years, banks’ total loan portfolio has remained steady, ranging from EUR 14.5 – 15 billion. This can be explained by broader processes within the economy, which are reflected in the index results, as well as in an improvement in the payment discipline of borrowers. Thus, for example, the percentage of unpaid loans in Latvia in December fell to 4.4%, which is below the European average. However, as the ALCB points out, although the ability and desire of banks to lend is high, the volume of loans issued is primarily linked to the desire and ability of customers to borrow.
“From the perspective of business, the index shows that the business climate in the country as a whole is growing steadily. In various sectors, this could be linked to co-financing from European Union structural funds, as well as to an increase in the exporting capability of Latvia’s businesses,” explains Aigars Rostovskis, President of the Latvian Chamber of Commerce and Industry, “Lending is undeniably a significant factor in the growth of business, and it’s positive that in recent years we’ve been able to talk about growth and can continue to do so.”
The Bank of Latvia’s Chief Economist Olga Lielkalne commented that, “The rapid growth of Latvia’s economy and developments in external markets are favourable for the ongoing improvement in domestic borrowers’ solvency and the growth of lending. However, it is likely that in 2018 lending will continue to grow very moderately. To facilitate a health growth in lending, not only is a favourable economic climate vital, but so are restriction of the shadow economy, a stable legal environment, and progress in the performance of structural reforms. This would reinforce banks’ desire to issue loans, as well as to increase the confidence of potential borrowers about the future, thus precipitating greater demand for loans.”
The ALCB Lending Index is a unique and complex measurement that characterizes the ability and desire of the current Latvian economy (consisting of both households and businesses) to borrow, as well as the ability and desire of the banking sector to lend. Under its auspices, a total of 16 different indicators have been analysed such as payment delays, changes in the unemployment level, the proportion of the shadow economy, the banking sector’s financial data, and mood of consumers, etc., thus generating a realistic picture of the complex nature of lending as a driver of the economy. The ALCB has developed the index, in collaboration with number of Latvia’s leading specialists in the realm of economics and lending, as well as by analyzing the best examples of international practice.
A more comprehensive look at the ALCB Lending Index results and a description of the methodology used to develop it are attached to this message.
Presentation: ALCB landing index 01.2018