The ability of companies and households to borrow is good and is more varied than before
The latest review from Eesti Pank of the Financing of the Economy finds that companies and households have good access to credit. Competition has increased in the banking market and so the set of possible borrowers has increased and lending conditions have eased a little. The options for funding have become more varied as non-bank financing has grown rapidly.
Corporate assessments of access to funding are at their highest level of the past eight years. Companies consider that the willingness of banks and other lenders to lend has improved. The most concerned companies are in accommodation and food service, and in transport, as they have been affected most by the spread of Covid-19 and the related restrictions. The highly active real estate sector is the most satisfied with its funding options. Good access to loans and increased demand boosted the growth in lending by banks to the whole business sector to around 7% by the end of 2021. The Eesti Pank December forecast 2021 expects corporate indebtedness to grow at around 8% in the coming years.
Rising incomes and the buffers they have built up are supporting households in their ability and desire to borrow. At the same time the banks have become more active in the housing market. This overall reflects the rapid growth of over 9% in lending and also how housing has not become much less affordable or accessible over the past five years despite prices rising fast. Demand for consumption loans has been more modest than previously over the past year. Interest rates on consumption loans have been very high so far, but competition pressure has started to push them down a little.
The ability of banks in Estonia to lend has remained good and the loan supply has increased. This means that the set of possible borrowers has increased and lending conditions have eased a little. The confidence to lend has been supported by the good performance of the economy, which has seen loan repayment problems for small businesses and households and loan losses at extraordinarily low levels. The capital buffers built up in earlier years, the rapid growth in deposits, and bond issues have helped the banks provide sufficient funding.
Competition has increased in the banking market. Several domestic banks have grown strongly and have increased their market share. This was particularly noticeable in the market for long-term corporate loans. The domestic banks increased their share of the housing loan market for households to a lesser extent, but it is still the large foreign-owned banks that dominate there. The market for consumption loans was already more evenly distributed and less concentrated. The result of competition pressures has been that average loan interest rates have fallen a little. Competition should increase in the banking market in future, as several banks are aiming to grow further.
The rapid growth in non-bank financial intermediation through private equity, hedge and investment funds, crowdfunding, savings and loan associations, pension funds, stock markets and more has increased the options for finding funding. A bank loan is often not the best option for financing for very small companies or those that are just starting up, as they have no credit history, or insufficient collateral or equity. Non-bank financial intermediation is increasingly helping to fill this gap. Stock markets and funds equally give larger companies ways to use equity capital more simply alongside debt capital. Although non-bank financial intermediation remains modest in Estonia, a record number of businesses funded themselves through non-bank financing in 2021.