Latvian state institutions are shouting at local commercial banks to increase the total amount of loans issued. At times, the stinginess of commercial banks is declared to be the same root of all Latvia’s misfortunes as the greed of quick loan providers ten years ago. The fight against them was basically finished in 2018 with the capping of interest rates and the banning of advertising. That’s why the industry is less visible now, but it has remained and turns over a couple of billion euros a year. For comparison, we can cite the argument of the banks, with which they recover from the demands of state officials to hand out depositors’ money with a lighter hand. Namely, that the nominal value of the credit portfolio of commercial banks has grown from 14.4 billion to 15.4 billion euros during the past year. Thus, the growth rate of 7% is far behind the inflation rate of 22%.
Money should be given only to those who are able to pay
The peculiarity of Latvia is that the supervision of non-bank creditors is delegated not to the supervisors of the financial system, but to the Consumer Rights Protection Center (PTAC). Its director Baiba Vītoliņa (pictured) confirmed that “PTAC’s function is not to invite creditors to lend. Money should be lent only if a person needs it and if he will be able to return the money. Assessing solvency is more important than increasing the amount of loans.”
PTAC has prepared an overview of the work of non-bank lenders in the past year. On December 31 of last year, PTAC had to monitor 38 companies licensed to issue loans to private individuals. Of these, 36 companies continued to issue new loans last year.
Not long ago, the Latvian association of financial technology and non-bank sector service providers, Fintech, presented its version of the non-bank lending industry, which brought together 17 companies. They recognize only 27 lenders as belonging to the industry, including companies licensed by PTAC and companies noticed by market participants but not by PTAC.
The investment amount does not increase
In PTAC’s version, the amount of newly issued loans by non-bank lenders to private individuals reached 664.6 million euros at the end of last year, while the loan portfolio with the balances of previously issued loans – 945 million euros. At least in percentage terms, the growth of loans from non-bank lenders with +14.5% for the volume of new loans and +13% for the volume of the entire loan portfolio is ahead of the growth of bank loans.
The enthusiasm for handing out money ends with data on stagnation in lending to legal entities. The public usually does not imagine that the total loan to legal entities of companies known for consumer lending (more precisely, we should talk about the brands with which these companies operate) is larger than the loan to private individuals. At the end of last year, it reached 1.16 billion euros, divided among 43.4 thousand loans. This loan portfolio has decreased by 85 million euros. In percentage terms, the decrease is less than one percent, but the trend towards reduction proves once again the deficit of projects capable of recouping in Latvia. It should be reminded that the actual value of the loan portfolio decreased along with the decrease in the purchasing power of the euro by 22% in the consumer price segment. Non-bank lenders have adapted to the situation, very significantly, by even reducing the number of loans by 1/4 and increasing the amount of each loan approximately at the rate of inflation.
The increase in the amount of consumer loans, contrary to the decrease in the amount of investments, signals the circulation of money issued during the covid hysteria from one wallet to the next wallet. Non-bank lenders have become diligent intermediaries in this redistribution of money.
Rejects 80% of those asking for money
According to PTAC data, at the end of last year, 432,441 credit agreements between non-bank lenders and private individuals were valid. With reference to the fact that non-bank loans are often also called quick loans, PTAC data could be reconciled with Fintech data that last year only 17 non-bank lenders issued more than 600,000 loans. If many loans are returned within a few months, they are no longer included in the year-end index.
According to the observations of Fintech members, they are dealing with professional users of non-bank loans, whose total number in Latvia is between 100 and 150 thousand. They borrowed money from one non-bank creditor to buy a car, from another – to buy a refrigerator, and from another – for bread, probably also with butter. The non-bank lender industry’s explanation for the same borrowers being saddled with multiple loans is the lenders’ specialization in lending types, rather than the borrowers’ efforts to repay one debt with the next debt.
There are two arguments in favor of the version about the good material situation of non-bank debtors. The first – loan repayment delay is less than 1/10 of debts. Further, only a “relatively small proportion”, as Fintech claims, of delinquent loans make it to debt collection with the help of public authorities. Payment settlement is usually achieved through refinancing, extension of payment terms, reduction of penalty interest.
The second is the refusal to issue loans to more than 80% of loan applicants. There is a stable group of people in Latvia who are not rejected, but blessed with the next loan because they already owe someone and by arranging the repayment of previously taken loans, they earn the trust of lenders. The reference to financial technologies contained in the Fintech transcript also means a lightning-fast exchange of data between lenders, so that they can immediately recognize the right or their own loan applicants from the majority of wrong applicants.
A thousand euros is not money for banks
It is likely that the relationship between the customers of non-bank lenders and the shadow economy is close, but it is not the only source of origin of customers. Non-bank lenders explain that they are doing what banks don’t want to do at all. In other words, they don’t want to issue loans in the amount of one hundred or even only ten euros. The ideal of banks is to lend not hundreds, but hundreds of millions of euros to one customer, preferably to a state-owned company, in order to earn without risk and with minimal expenses in servicing the loan. It is better for banks to lend many millions of euros to non-bank lenders at once at such interest rates that non-bank lenders can earn from loans to their customers at higher interest rates, rather than taking the effort to reach many small loans, the average amounts in euros according to PTAC calculations are as follows:
The main occupation of non-bank lenders in the consumer lending segment is the issuance of distance and consumer loans. The similarity of the issued amounts, both in absolute numbers and in dynamics, strengthens the belief that this division now has a historical and bureaucratic, rather than substantive, meaning. The amounts of these credits roughly reflect the increase in prices for repairing one tooth in recent years.
How to pay extra, but not overpay
Non-bank lenders must find customers in conditions where commercial banks regularly offer consumer loans to anyone whose current account shows very little stable income. Those who do not receive such offers must expect higher credit rates. Non-bank lenders tend to hear a public “fui” about it. Fintech had entrusted the presentation of its data to Riga University School of Economics professor Arnis Saukas (pictured). Regarding the difference between credit rates in banks and non-banks, he said that “the lack of understanding by the public, as well as often by regulators and legislators, about the relationship between risk and rate is a certain problem. Non-bank sector credit providers are those who provide the opportunity to borrow even for those customers who would not be able to get a loan elsewhere, besides, the industry’s interest rates are regulated by the state.”
The interest rate ceilings set by the state for non-bank lenders are not expressed in annual percentages, but as a ratio between the amount lent and the amount to be returned, which cannot exceed a certain amount. The recalculation of this ratio by PTAC into annual interest rates gives 44% per year for interest and 52% for the debtor’s total costs, in which the lenders, without interest, add a fee for examining the loan request, etc. services. PTAC is determined to ensure that the real cost of loans does not reach its historical maximum in such a roundabout way.
The schedule prepared by PTAC shows the drop in the price of loans from non-bank lenders following the state order, but the title of the schedule announces a visually not very impressive increase in the price of loans in accordance with the decisions of the European Central Bank to gradually raise its refinancing rates.
Fintech claims that current interest rates are 10 or even 20 percentage points lower than the result of PTAC calculations. Non-bank lenders acknowledge the increase in credit prices with the explanation that they are forced to pass on to their clients the increase in money that they are forced to pay to commercial banks, because they include the increase in the central bank rate in the increase in their loan rates.
2023-05-12 02:15:04
#Commercial #banks #rejected #customers #borrow #expensively
