The access of Estonian companies and households to bank loans is generally good. This is shown by loan growth that is notably faster than the average in Europe and also by survey data. The opinion of companies about the lending environment became much better at the end of last year. It probably improved because of interest rate cuts, but also because the recession ended. Sentiment was better in all sectors, but especially so in real estate. Interest rates on loans are high in Estonia in international comparison, but the opinion of Estonian companies about their ability to access financing is similar to the average in Europe.

The good capitalisation of the banks, their ability to earn profits, and the stable and cheap funding provided by deposits are supporting the supply of loans from Estonian banks. There are more deposits than loans in the banking sector as a whole, though the picture varies across banks. More than half of the deposits are demand deposits, which gave the banks a stable and cheap resource and allowed them to grow their loan portfolio and remain highly profitable. The market power of smaller banks has increased as interest rates have come down, as they use term deposits more than the larger banks to fund their activities. The interest rates on term deposits have fallen by more than the rates on demand deposits, as those were already close to zero.

Survey data show that finding suitable collateral for a loan has been a particular problem for Estonian companies for years. Companies in Latvia and Lithuania face the same problem because companies in the Baltic states are smaller in size than the European average. The bank groups operating in the three Baltic states take a similar approach across the three countries to the type of collateral that they demand and the amount of a loan that needs to be backed by collateral. It can be particularly difficult for new companies and regionally-based companies to find collateral that is suitable for the banks. Analysis shows though that the amount issued in loans outside Harjumaa as a ratio to the number of companies or to value added is no smaller than the amount issued as loans in Harjumaa. The banks operating in Estonia are small in international comparison, which can make it harder to get financing for very large projects and companies, though this problem has largely been resolved through loans from abroad and syndicated loans. A syndicated loan is one where several banks join together to provide the loan.

The European Central Bank has cut its interest rates five times since June last year, and the impact of this has reached Estonia quickly because loan contracts with floating interest rates are widely used. Cuts in the central bank interest rates have reduced the rates in Estonia both on new loans and on those taken out earlier. Financial market participants expect that interest rates on loans will come down further during 2025 and that Euribor will be around 2-2.5% in the years ahead. The effect of interest rate cuts will reach borrowers in Estonia and offset the earlier rises in rates faster than in most other countries, where loan contracts with long-term fixed interest rates are more common. The interest rates on term deposits have also come down, but the rates in Estonia remain among the highest in the euro area.

Pressure from competition has pushed down the interest margin on the average housing loan in recent years, but not the margin on corporate loans. The banks themselves say that competition has put a lot more pressure on housing loans than on corporate loans. The challenging economic environment and loans issued with higher credit risk than some years ago give some explanation for why margins on corporate loans have not been reduced. Interest rates being above the average internationally is particularly a problem for exporting companies that have to compete in foreign markets with firms that have an advantage in the cost of financing.

The supply of equity from private equity and venture capital funds gives substantial support to the development of startup and early-stage companies. Non-bank financial intermediation still plays only quite a small role in financing the Estonian economy, but it is an important source of financing for small companies and those in the startup or growth phase. Such companies often do not qualify for a bank loan or cannot access funding because the banks do not have enough data on how the company has met its loan obligations in the past, and there may also be problems with finding sufficient collateral or equity. Non-bank financial intermediation helps to fill this gap. Estonia stands out among other countries for the good work of its local private and venture capital funds, and also because a lot of investment reaches Estonian startup companies from outside Estonia.

As borrowing in Estonia is quite expensive in international terms, Eesti Pank believes it would be worth considering all the proposals that Eesti Pank and Finantsinspektsioon made last February for encouraging competition in the domestic lending market. The package of proposals would make it quicker, simpler and cheaper for people to transfer their housing loan from one bank to another. That would increase competition, allow more ambitious banks to grow faster, and reduce interest costs.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
Press enquiries: [email protected]