…BENEFITING HOUSEHOLDS AS WELL AS COMPANIES.
Publication: Monitor Volume: 7 Issue: 107
A similar process can be seen on the household side. Bank loans to private individuals at the end of the first quarter had grown to 177 million lats (US$281 million), up 59 percent from a year earlier. Mortgage lending–which was nonexistent a few years ago–grew 15 percent during the first three months of the year, and accounted for 12 percent of the total credit portfolio (BNS May 18)
There is room for more lending growth, however, as deposits continue to grow faster than loans. The amount of deposits drawn from private enterprises and financial institutions amounted to 1,190 million lats (US$1.9 billion) at the end of the first quarter, 32 percent more than a year earlier. Individual deposits rose 55 percent over the year, to 542 million lats (US$858 million), suggesting both strong growth in household incomes and increased public trust in the Latvian banks. Moreover, the ratio of demand deposits (checking and other highly liquid accounts) to total deposits had dropped from 67 percent in March 2000 to 62 percent in March 2001. This growing stability in the deposit base increases banks’ flexibility in the use of deposits, and helps promote long-term lending to finance company investments.
Latvian enterprises are recovering from the Russian ruble crisis, as production and profits are rising–8 percent growth in industrial output was reported during the first quarter of the year (Bank of Finland, Russian & Baltic Economies: The Week in Review, May 18). Companies’ improved financial positions are helping banks’ balance sheets to recover as well. Bank loans classified as “doubtful” have actually decreased in 2001, despite the strong growth in bank lending. Loans classified as “nonperforming” dropped to 4 percent of the total loan portfolio after the first quarter of 2001 (down from 7 percent at the end of March 2000), while the share of “close watch” loans fell from 3 percent to 2 percent.
This trend could reverse itself in the medium term, as more bank lending will is likely to eventually mean more risky loans. Still, Latvia’s banking system now seems fundamentally sound, and a somewhat more aggressive lending policy, combined with continued strong regulation, should help boost investment, production and economic growth.
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