RIGA - The level of bad credit is soaring in Latvia, straining bank balance sheets and pushing lenders into changing attitudes towards their customers. In 2007 banks reported that 3 percent of their credit portfolios were set aside in loss reserves. By the beginning of 2009 this number had catapulted to 20 percent.
Difficult financial conditions, high and rising unemployment and negative trends in GDP have worsened an already difficult situation in the lending sector. The state, borrowers and banks are being forced to adapt to these new conditions.
The market value of real estate in Latvia has fallen by more than 40 percent, including new development projects, and by more than 60 percent in the secondary residential market. Rising joblessness and worries over wages have created conditions where former levels of lending growth won't repeat.
The question is, for customers who have run into financial difficulties, how is their friendly banker moving to resolve credit obligation problems.
"SEB actively works to re-structure credit obligations, offering various options, for workouts," says SEB bank press secretary Elena Golovko. When the repayment of the loan isn't feasible, "judicial office work, and the subsequent sale of the real estate at auction, means a painful and expensive process for both sides. Besides, the bank as the financial institution cannot be engaged in the sale or service of properties," she adds.
Golovko says that from the beginning of the year the bank has considered about 2,290 cases on debt payment problems. "In most cases re-structuring is successful, and the client continues to work with the bank under new conditions, understandable to him. Other clients demand further re-structuring, with some showing complete indifference" to the process, says Golovko. It is these cases which the bank takes the route to court to settle.
"The case is transferred to court for a decision. If the court has made the decision [in our favor], the property is sold through auction," she says.
Not all banks follow this practice. Some have created separate, affiliated companies which are engaged in the sale, or take-over and management of the 'problem' property. At the Latvian branch of Nordea Bank Finland, there is the subsidiary Promano Lat. Aizkraukle bank has its AB.LV Transform Investments company. These affiliates often represent banks at the auctions of the 'problem' assets, and are engaged in sales and purchases of real estate in the secondary market.
Rising interest rates on variable rate mortgages, and rising unemployment are resulting in more and more delayed loan payments. "We took a loan from Swedbank in 2007. I lost my job unexpectedly in 2008; my wife was pregnant. It was clear that we could not continue to make the original credit payments," says one borrower, Alexander.
He goes on to say he informed the bank about his problems, though the reply was not what he expected. He says the bank "told me that these are my problems, that I should look for work. Three months passed and I was being charged penalties for overdue payments. The bank sent us three notices for payment, but nobody tried to work with us. There were no offers for any exit from this, the bank simply sent us a decision that our apartment was to go to auction." Though after three months the flat hasn't been sold, Alexander complains that they "live under threat of eviction, with a small child, and as it was explained to me, I have no chance to recover the apartment from the bank."
If the flat sells at auction, and the new owner pays an amount less than the balance of the mortgage, the bank tries to recover the remaining amount. "If after the sale the borrower still has an obligation to the bank, we continue to work with the customer for repayment of the debt. It is also possible to re-structure the remaining balance," says Golovko.
This can be done by "changing the amount or the schedule of the credit payments, taking into account the real cash flow of the customer. A write-off of the rest of the debt, after a voluntary sale, would destabilize the banking system in Latvia, she offers.
Swedish Swedbank on its homepage gives complete information on how to proceed, in cases where its customers meet debt repayment difficulties. The bank, for example, offers a program to fully analyze a credit portfolio, how to re-structure debt obligations, calculate credit vacations or adjust credit rates. It has a special e-mail address for customers who may be heading into trouble.
Alexander considers that banks have changed their policies in regards to its problem borrowers, as they have been hit by this squall of bad debt. "Our problem started at the beginning of crisis. Banks were full of confidence believing that major economic problems in Latvia wouldn't happen. Their forecasts were more optimistic, therefore they did not handle their borrowers with kid gloves. Now in most of the banks are departments that are engaged in credit risk, they are working to resolve customers' problems," remarks Alexander.
The re-structuring of credit obligations involves a contractual change. There is also a service fee, depending on the credit institution and form of agreement. The customer can pay from 0.5 percent to 5 percent of the contractual sum.
In this deteriorating economic situation the Association of Commercial Banks of Latvia, together with the Ministry of Finance has developed a program to support the borrowers. It assumes distribution of risks between all three parties. According to the latest draft, the state picks up the loan payments for a certain period, with the bank charging interest on 80 percent of the balance of the credit. The borrower must work to improve his situation, including looking for a new job, to fulfill the original obligations.
On June 9, 2009, the law on protection of consumer rights came into force. It says that the bank cannot demand from the borrower additional guarantees, or change interest rates, if the customer has not violated conditions of the previous contract. The customer can ask the bank for a revision in terms of payment, and for an extension of the contract.
