Insolvency law may deepen financial crisis

  • 2010-07-28
  • By Kira Savchenko

FRIENDLY BANKING: To cover expected losses due to the new law, borrowing rates will go up, says Teodors Tverijons.

RIGA - The parliament passed the controversial Insolvency law, which is aimed to help borrowers who find themselves in trouble with their finances. Banks are extremely unhappy with the new regulation and promise to raise interest rates for the new customers in order to cover expected losses. This could slow lending down even more in Latvia and make recovery of the economy more complicated, bankers say.

Parliament approved Insolvency law in its first reading in June, but President Valdis Zatlers had to turn it back to make the regulation more efficient: neither borrowers, nor banks, were satisfied with that law’s edition. Afterwards MPs tried to tackle the maligned bill many times, but no agreement had been reached. Finally, the lawmakers succeeded in finding a compromise version and on July 26, 90 lawmakers voted for the regulation.

According to the new law, if a borrower’s income is enough to pay back 50 percent of the total liabilities remaining after the bankruptcy procedure (the sale of the mortgaged property), the insolvency process will continue for one year. The rest of the amount will be written off. If the borrower’s income allows the paying back of only 35 percent of the debt, the process will last for two years. Three years will be given to a borrower who is able to cover only 20 percent. If the debt does not exceed 100,000 lats (142,800 euros), a person will have one-third of the income during two years taken to cover liabilities. The insolvent person will have to pay back only the principal sum and 6 percent to cover administration of the process. 

The necessity of such a regulation appeared in 2008 when, after several years of economic boom, the global crisis hit this tiny Baltic state hard. As a result, many people lost their jobs and found themselves unable to pay back their mortgages. Prices on real estate dropped by over 25 percent, leaving borrowers with debts that are higher than their incredibly overpriced apartments are worth. In addition, salaries for many have been cut for 15-40 percent.
Banks were very unhappy with the regulation and warned about likely interest rate increases. There will be losses caused by the law and credit establishments will have to compensate for it, said Teodors Tverijons, president of the Association of Latvian Commercial Banks.

“Banks have already stated that loans will probably become more expensive. All MPs knew about this when they made the decision. This law can make the banking and financial crisis worse and delay economy recovery.”
Bank and client relationships are already regulated  by contract and there is no need for the state to interfere. It is more efficient to try to find a way out without becoming insolvent, and to negotiate a new loan scheme, said Tverijons.
Before the parliament session, the Latvian Borrower’s Association organized a picket. People were holding placards, saying “The coalition receives salaries from the banks!”, “We are against the feudal bill!” and others.

However, they are satisfied with the final version of the regulation. “This law is not perfect, but we consider it as our victory. The first versions were much worse and less fair. This regulation will help people to negotiate with banks, who do not want  the insolvency process to start,” said Ainars Gorenko, Chairman of the Latvian Borrower’s Association.
The new law comes into effect on Nov. 1.