Growth in the economy is not hindered by access to funding
Eesti Panga ökonomist
The capacity of the banks in Estonia to lend has remained good despite the Covid-19 crisis. The capital buffers built up in earlier years, rapid growth in deposits and the issuance of covered bonds have ensured that they have sufficient funds. This has allowed them to issue new loans to companies and households and to offer extensive payment holidays. The outbreak of the virus last spring affected the risk assessments of banks and so they tightened their lending standards, but they eased them again in the second half of 2020 despite the second wave of the virus.
Competition in the banking market increased in some segments in 2020, unlike in the previous couple of years, but competition in the Estonian banking market is still weaker than that in many other countries in Europe. Several domestic banks have grown strongly and some large foreign-owned banks are again active in the lending market. This has gradually increased competition pressures, and the average interest rate has fallen a little. Competition should increase in the banking market in future, as several banks are aiming to grow further and issuing covered bonds has expanded the options for funding. It should be noted though that the small banks are not able to compete yet with the large banks in all loan segments, especially on the price of loans.
Non-bank financial intermediation in the form of private equity, venture capital and investment funds, crowd funding, savings and loan associations, pension funds and more has so far coped relatively well with the difficult times and has been able to fund companies and households in its own niche. Funding provided by non-bank financial intermediation grew more slowly in 2020, but the growth still continued and was again faster than the growth in bank loans. Growth in corporate equity stopped last year, as profits and reinvested income fell. Equity continued to be supported by inflows of foreign investment though.
Corporate assessments of access to funding at the end of 2020 were at about the same level as in 2019. Access to funding was considered to have deteriorated in the first half of the year. The coronavirus crisis affected above all the outlook for companies to earn revenues and so their desire and capacity to borrow. Access to funding has been made worse in the sectors affected most by Covid-19, such as accommodation and food service, and transport, as the credit capacity of companies has declined and lenders have become more cautious. The cost of borrowing has increased for these sectors.
Apart from a short period in the spring, demand for housing loans remained strong in 2020, though less was taken out in consumption loans. Households with a higher income than the average have been hurt less by the crisis and after a short period of uncertainty their willingness to borrow recovered. Competition has gradually started to increase in the housing loan market and this has probably affected interest rates, which have fallen a little. There has equally been an increase in loans issued with a relatively high loan-to-value (LTV) ratio of 85-90%. Demand for consumption loans was notably smaller last year than in previous years. There are many providers of consumption loans, but this has not brought down the price of loans.
The Estonian government, like those in other countries, supported businesses during the Covid-19 crisis with direct loans and guarantees for bank loans. The total amount given as direct loans and guarantees was around the European average. Many companies that were particularly hit by the crisis have benefited very much from this. Direct loans issued by the state dominate in Estonia though, and substantially more of them were issued than the European average. It is debatable whether it is wise to provide cheap direct loans at a point when the private lending market is functioning despite the economic crisis. The state needs to be careful, as interfering in the lending market could crowd out smaller but growing banks, and so hurt competition. The state would be better to prefer guarantees to direct loans. This would preserve the useful risk assessments of the private sector, harm competition less, and use less taxpayers money to achieve the same goals.
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