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International Internet Magazine. Baltic States news & analytics Wednesday, 29.11.2023, 06:00

Lending for business: challenges and opportunities

Arthur Yuksh, Head of Rietumu Bank’s Lending Department, 05.03.2020.Print version
The preliminary results of 2019 clearly indicate that the loan portfolio of Latvian banks has stabilized. Moreover, judging by the statements of industry participants, the credit function is considered by many as a priority.

But another thing is also true: there are a number of problems that impede the development of this important area both for banks and for the economy as a whole. These issues are solvable, but so far unresolved, and therefore deserve attention.


After the start of an important reorganization of the entire financial sector, Rietumu continued business financing as a priority direction, but now with a primary focus on the Baltic countries. We managed to reorient the loan portfolio, significantly increasing the share of resident loans, started cooperation with a number of promising strong clients in Latvia and other Baltic countries. In numbers, this means that only last year, about 150 million euros were issued in new loans for business development, of which about 100 million were given to new customers.


Continuing to do this important work, we cannot help but see the obstacles that both sides have on this path - both the one that wants to attract the necessary financing and the one that is able to provide it, that is, the banks.


It’s not a secret for anyone that business development requires, first and foremost, political and economic stability, understandable “rules of the game”, that is, relevant laws and consistent government policies. The business community must understand, in which direction the country is developing, which sectors of the economy are priority and where we want to see ourselves in the near and distant future.


However, over the past year alone, we have come across a number of large credit projects, which were either put on hold or their implementation became excessively risky, and not for commercial reasons. Turbulence around the municipality of Riga and Latvian ports, revisions of the results of state tenders, and other changing “rules of the game” played a role here.


Take, for example, the major components of the local economy: transit and ports, energy, agriculture, municipal enterprises, the banking sector, the real estate sector - non-stop rhetoric is heard everywhere about planned changes, or about increased risks, or about corruption scandals, or about past errors that need to be fixed.


All this, of course, has a bad effect on the entrepreneurial initiative and makes banks more cautious in assessing additional risks. We will experience a serious negative impact on the country's GDP in the next few years. But this is not the only problem.  The general negative background makes the future expectations of the country's residents pessimistic, which affects the decrease in the population, the willingness to take on additional obligations, the desire to spend money, and so on. In short, the effect multiplied.


At the same time, the country's most authoritative economists say: in Latvia there are no prerequisites for a crisis - we have one of the lowest population debt levels in the Eurozone, a significant level of savings, stable real estate price indices, and long-term economic growth. But, despite this, in reality there is a widespread feeling that people expect a crisis.


I note one interesting point. We see quite a lot of Lithuanian and Estonian investors who come to our market or plan to move here in the very near future. Businessmen from these countries often believe in new opportunities in Latvia and the potential for successful development here much more than local entrepreneurs. I think the mentioned above factors play an important role in this. For our part, we are pleased to consider such potential projects and, I must say, many of them, in our opinion, have good prospects.


I’ll mention one more Latvian feature - according to our data, up to 60% of enterprises do not change the banks serving them for decades. They may complain, be dissatisfied, but at the same time they are rather inert and do not “probe the market”. In our opinion, now is one of the most favourable moments for business to look around and evaluate the alternative possibilities of attracting a financial resource. It is possible that the result may pleasantly surprise.


Speaking about the legislation, the urgent issue of regulating the credit sphere should be emphasized. The activities of banks, including in this area, are known to be strictly controlled, which guarantees stability and works in the interests of customers. At the same time, modern technologies suggest other lending options, where there is virtually no such level of control yet.


Specifically, I mean p2p/crowdfunding platforms that have quickly gained popularity, allowing entrepreneurs to easily borrow funds, including for poorly made business plans, and to owners of funds to lend them at high interest rates. Here, of course, there is still a wide field for “business creativity”, including in a negative connotation. Yes, in this area there are definitely a number of positive examples where business is put on a professional basis, but at the same time there are a number of platforms in which it is difficult to believe they run an honest business.


I really hope that in the near future the regulator will take the necessary legislative measures to protect the interests of ordinary unprofessional investors who place money on rather risky assets on such platforms. And that at the same time, this regulation should not become excessive and killing any opportunity to do this business in Latvia, create new jobs and actually export financial services. This requires balance and common sense on the part of the state.


At the same time I believe that the situation should not be considered too dramatic. On the whole, we maintain a positive outlook on the future and are actively lending to projects in completely different areas: development of residential and commercial real estate, hotels, trade and shipping, manufacturing, and much more. The projects related to financial technologies are still interesting, and the geography of such projects can be very extensive.



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