RIGA - The Latvian credit market is at a crucial turning point. For years, Latvians have been running to the banks en masse to take out loans both large and small 's a major factor in the country's economic boom.
With the new year well under way, however, banks and private lenders have been experiencing a fall in lending and rise in defaults. In fact, in its most recent monetary bulletin, the Bank of Latvia found that the credit lending increase at the end of last year fell to 37.5 percent 's the lowest level since early 2003.
"Currently, the pace of Latvian economical developments has slowed down and it is entering a new phase... the credit volumes are increasing at a slower pace," Jorens Raitums, vice president of customer service for corporate clients at Parex Bank, told The Baltic Times.
While the market is still going relatively strong, the drop is far from an isolated phenomenon. This change seems to be taking place across the board as both companies and private individuals cut back on large- and small-scale loans.
Many analysts and experts agree that these signs point to a new era for the Latvian credit market.
"The lending industry is at a turning point these days. The banks have to learn how to operate differently, not relying heavily on real estate as collateral, but assessing credit risk," GE Money Latvia head Dmitry Tsymber told The Baltic Times.
"The industry has to better understand levels of indebtedness [and] sources of income, while people still have to learn a lot when it comes to personal finance and family budget planning," he said.
In order to duck the rules and get a big loan despite tightening credit restrictions, some people have resorted to forging income statements.
"It is quite clear that households and even some companies are hiding their real incomes," SEB Chief Economist Andris Vilks told TBT.
In December, the State Revenue Service uncovered a number of cases in which people had forged income statements in order to get loans of over 12,000 lats (17,000 euros), a critical benchmark for lending agencies.
Though nearly every bank has encountered forged income statements in the past few months, the number of these cases is still not very large and the recent introduction of a credit registry system has helped to stymie the problem.
Analyzing the drop
It has been clear for some time that the rapid increase in credit lending could not last 's people can only borrow so much money before they start having trouble making payments. But the question still arises: with the market still far from saturated, what has triggered changing times?
There have basically been two catalysts that brought these changes about 's government regulations and fears that the economy will experience a severe decline.
"At the moment there are slight problems because of both the government policies and the general economic situation in the country," Sanda Abola, vice-president of the responsible crediting branch at Latvijas Krajbanka, told The Baltic Times.
The government's anti-inflation plan has had the strongest effect on large-scale loans, especially those related to real estate.
"The first implications of anti-inflation regulations have been seen in the real estate segment. Overall, this caused less amount of money available in the economy. As a result, the level of late payments is increasing as people have less money to spend," Tsymber said.
Abola explained, however, that government regulations have not had a very large effect on small-scale credit lending.
For small-scale loans, the driving factor behind the change is a shift in the general economic situation in Latvia 's and a shift in what people think the future may hold for the country.
"People are not so confident about the future economic situation, and that is the main reason. Companies and households are postponing plans until they can see what happens," Vilks said.
Room to grow
Though the credit business is on the verge of change, there is still plenty of room for growth in the market. Tsymber explained that credit levels are still lower than in most European countries.
"Latvia is still far below the European average rate of write-offs [defaults on loans]. Credit penetration in Latvia is still lower than in many other European countries, so there is a capacity for credit growth in this country but the growth can be a bit slower than previous years," he said.
"There is still demand out there. People are still borrowing," Abola said.
Moreover, the drop in demand is not nearly as drastic as many analysts had feared last fall. "There was quite a confused situation over the autumn months when we thought there would be a very dramatic decrease, but this has not happened, though there are still [a few] different possible scenarios," Vilks said.
Lenders are taking an active roll in trying to keep the credit market strong before the situation does get out of hand. Most lenders have started to evaluate each customer on an individual basis 's as opposed to following wider guidelines based on hard numbers 's and are working on restructuring the loans of existing customers.
Whatever strategies banks and private lenders may take to keep the customers coming in, ultimately there is not very much they can do.
"When it goes down there is nothing much you can do about it, the situation is what it is and there is not much that a bank can do to change that," Abola said.
Estonian and Lithuanian lenders have found themselves in a similar situation as their economic growth falls to more manageable levels.
"The spring months are very crucial. A new cycle is coming, and all the Baltic states right now are experiencing this shift," Vilks said.