Banks could increase their corporate loan portfolio by EUR 2 billion - Bank of Latvia

RIGA - There is a possibility for commercial banks in Latvia to increase their aggregate corporate loan portfolio by EUR 2 billion, Bank of Latvia economists Anete Benke, Karlis Vilerts and Konstantins Benkovskis write on the central bank's analytical website Makroekonomika.lv.

The economists note that there are about 170,000 companies in Latvia but that only a fraction of them (10,000 companies, or 20,000 companies including leasing) have taken out bank loans. 

The central bank's economists believe that the reason why the vast majority of firms do not borrow from banks may have as much to do with the willingness and financial capacity of the companies to borrow as with the willingness of the banks to lend to them.

While it is quite difficult to draw data-based conclusions about companies' willingness to borrow and banks' willingness to lend to them, it is much easier to estimate companies' financial capacity to borrow, the economists say. One option is to use a relatively simple deductive method to select those firms that are unlikely to be able to obtain bank loans. Looking at the companies that do not fall into this category gives an indirect answer to the question of how many more creditworthy companies there are in Latvia.

To make these calculations, the Bank of Latvia used the State Revenue Service's data on about 110,000 companies for the period 2019-2021, covering the majority of companies and by far the largest share in terms of assets. Of these companies, around 10,000 have received bank loans.

Among the 100,000 companies without bank loans, almost 40,000 have not been economically active or have not submitted all the required reports. In particular, no information on employees, turnover, equity or profits is available. It is unlikely that such companies would qualify for bank loans either, according to the economists at the Bank of Latvia.

Half of the remaining 60,000 companies' creditworthiness is called into question by their financial situation - either they have negative equity (liabilities exceed assets) or their average pre-tax profit for the period 2019-2021 was negative.

The remaining 30,000 companies have positive equity, are profitable and provide all the necessary information, the economists write.

However, among these, some 5,000 companies have wages that are significantly (one standard deviation) below those of companies in the same sectors that have already received bank loans. Economists note that low official wages can be one of the indicators of that these companies are paying unreported wages. However, even if these companies are excluded, this still leaves 25,000 creditworthy companies.

The Bank of Latvia economists acknowledge that some of these would not qualify for loans for other reasons such as size, age, ownership structure, and not all have the need or desire to borrow. However, even assuming that only a third of these companies would meet all the requirements, this would increase the number of creditworthy companies by around 8,000.

Assuming that the size of these corporate loans (as a share of liabilities) is similar to that of existing borrowers, the banks' corporate loan portfolio could be increased by EUR 2 billion, or 5-6 percent of gross domestic product (GDP). This leads the economists to conclude that there is already considerable potential for lending to businesses.

At the same time, the relatively high share of companies with weak financial health and the widespread shadow economy limit the Latvian companies' ability to borrow as actively as in other euro area countries, so further strengthening of companies' financial health is needed to boost lending activity significantly, the Bank of Latvia economists conclude.