Borrowing to regain momentum after economic growth
Jana Kask, Head of the Financial Sector Policy Division of Eesti Pank
The rapid recovery of economic growth in Estonia in recent quarters has not resulted in similar growth in borrowing yet. Although borrowing is steadily increasing, the loan and lease portfolios of banks will shrink by over 3% in 2011, as expected by Eesti Pank.
Loan growth will be moderate because of the changed financing needs of the economy. Companies are recovering from the recent recession with relatively little need for loan resources. On the one hand, they have been able to reutilise free production capacity in the new growth cycle. On the other hand, companies have been using their own funds and intra-group resources to finance business. The current loan demand is also shaped by the changing investment structure, which is no longer that much real estate oriented and that dependent on loan capital as it was in the previous cycle.
As growth picks up further, the need for loan resources will grow, considering that the current inventories and production capacity may not suffice to maintain or increase current growth rates. In 2011, the turnover of corporate loans has been boosted primarily by short-term loans, but the demand for investment loans will probably also bounce back any time soon. The financial behaviour of households remains cautious for a while, but borrowing has nevertheless gained some momentum in recent months, given that the labour and real estate markets are recovering and the household confidence is improving.
Banks' willingness and readiness to supply loans has increased over the year. Their capital position has gradually improved and their funding base is stronger owing to the growing volume of deposits. Although the share of overdue loans in the total loan portfolio is still high, banks are shifting their focus from the quality of the existing portfolio to issuing new loans, and competition in the banking market has strengthened considerably. This has resulted in a drop in interest margins, as expected.
See also the Lending Review No 1/2011 on Eesti Pank's website.
The Lending Review is a central bank publication that is published twice a year since autumn 2010. It gives an overview of financing and borrowing in the Estonian non-financial sector, and covers banking and leasing statistics, financial accounts analysis, and credit supply and demand.
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