The non-financial sector's borrowing ability has improved
Starting from autumn 2010, Eesti Pank starts publishing biannual reviews of financing and lending in the non-financial sector. The reviews cover banking and leasing statistics, financial accounts analysis and credit supply and demand.
Both the Estonian economy and non-financial-sector confidence have gradually recovered over the first three quarters of the year. The balance sheets of companies and households have gained in strength and the borrowing ability has improved. At the same time, the activity of both households and companies in the domestic credit market has remained subdued. The financing of the real estate and construction sector has decreased the most, whereas the borrowing activity of industrial and trading companies has increased.
Although domestic credit demand has declined, companies' direct borrowing from abroad has hiked. Among other things, this refers to the fact that the risk premium on the non-financial sector's credit has increased considerably more in Estonia than in the Nordic countries. The difference has not contracted much in 2010, either.
The economic crisis considerably increased the risk aversion of banks and they became more cautious in selecting their customers. Banks are currently regulating the loan supply primarily through different risk premia, while no constraints have been set on the number of new loans. The general high level of interest margins shows that banks wish to keep lending-related risks in check in the current economic phase. At the same time, banks have not established any direct constraints on financing credit demand, while they appear to be ready to increase the level of loans and also competition between themselves.
In the coming months, the situation of non-financial sector financing will probably be stable. It is likely to gain momentum again in the first half of 2011, when the recovery of economic activity and non-financial sector confidence will also be reflected in higher credit demand and tougher competition between banks.
The Lending Review is available here.
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