Commercial banks to ease lending, no fast recovery of real estate market expected

The October survey respondents reported a slight easing of short-term lending requirements by banks in most recent sixths months, while only one bank reported having done so for long-term loans.  Banks said they eased requirements for the loan to value ratio, but tightened assessment of the collateral quality.

“A more conservative approach has been determined by uncertainty surrounding the government debt problems and other market stimuli in recent months, which also contained the recovery of the bank and customer expectations. Not surprisingly, the forecast by financial institutions was more pessimistic not only because of the real estate market activity, but also because of housing prices. Banks, however, expect the lending requirements to ease gradually in the nearest six months and the gross value of loan portfolio to grow by 1 to 5 per cent in 2012,” Kristina Grigaitė, a senior economist of Financial Stability Unit of the Bank of Lithuania Economics Department said.

The survey has revealed that almost 60 per cent of respondent banks’ representatives holding senior management positions do not expect any real estate price growth and postpone the market recovery until the end of 2012. It was during the spring survey that some banks had forecasted the stagnation in real estate market to end this year and real estate prices to hike by around 10 per cent.

Banks also reported having applied to their average risk customers this year a maximum loan to value ratio equal to 70 to 75 per cent, which complies with good practice in risk assessment. Next year, as revealed by the survey, banks intend to ease down-payment requirements by applying a loan to value ratio in the 75-80 per cent range. This ratio would be more stringent than the 85 per cent limit established by the Bank of Lithuania’s Responsible Lending Regulations.

The opinion of banks and businesses regarding the crediting standards in the first half of 2011 varied. Banks reported of having eased lending requirements for the second consecutive month, while many businesses said the lending requirements of credit institutions have tightened. In fact, both banks and businesses expect the credit demand and loan portfolio to grow. The majority of respondent banks indicated that they were most conservative in the last six months with regard to loans to real estate, construction and hotels, and restaurants sectors.  As the main reason for such conservative view, the majority of banks indicated the uncertainty surrounding the outlook for economic activities in the above sectors.   Similar to the previous surveys, the best assessment among economic activities was given to agriculture and forestry.

“Although businesses say the lending requirements have tightened in recent six months, they do not consider the bank crediting policy a major obstacle for their operations, since three fourths of the surveyed businesses intend to use internal finances to fund their activities. It must be noted however that enterprises with business development plans for the nearest six months plan to get from banks at least one fifth of the funding needed,“ Virgilijus Rutkauskas, a senior economist of the Financial Stability Unit said to summarize the survey results.

Tax burden and increased production expenses have been reported by businesses to be the biggest obstacles for their activities in the nearest months.