Prospects of Lending Development in Latvia: Problems and Solutions

The development of the banking business is limited by the shortage of high-quality borrowers and the level of capital to cover growing risks. These factors lead to an excess of low-yield liquid assets, which increase the pressure on the profitability of a significant number of banks. The share of Latvian commercial banks with low-yield liquid assets and an inefficient business model is increasing. Increasingly, the crisis of business models is faced with average banks in terms of assets, which leads to a decrease in their presence in the market. The potential to increase bank profits from lending to the real sector of the economy is significantly limited by weak economic growth and increased capital requirements to cover credit risks. The excess liquidity generated by the lack of high-quality borrowers increases the pressure on the profitability of the banking business. Due to the limited base of high-quality borrowers, more and more banks are forced to place client funds in highly reliable but low-yield assets. However, despite this, the credit portfolio of the Latvian banking system tends to grow, showing positive dynamics. The situation with credit risks in the banking system has stabilized. The level of overdue debt on loans is decreasing and there are positive trends in the issuance of new loans. The purpose of the study is to analyze and assess credit trends in Latvia, as well as predict the development of the Latvian credit market using the extrapolation method. The results of the study can be used by commercial banks, as well as their borrowers.