Responsible Lending in Latvian Banks
July 13, 2012
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Jana ERINA, Ingars ERINS
Irresponsible borrowing promoted financial crisis not only in Latvia but also in the rest of the world. After the beginning of the crisis the government and other responsible institutions realized the necessity to promote responsible lending and borrowing.
The aim of this article is to clarify basic principles of responsible lending in lending agreements between banks and individuals in Latvia, as well as in the existing legislation that regulates this process.
In order to obtain research results the authors conducted qualitative analysis of scientific literature on the issues of responsible lending; legislation that regulates mortgage lending in Latvia; successful experience of banks in other countries, such as Westpac Group, Bank of America and Bank of Lithuania; information available on home pages of banks about commercial bank loan volumes for mortgage loans with different types of real estate asset backing; information included in loan agreements of four commercial banks and its compliance with the laws and regulations. Loan borrower evaluation stages for review of a new loan application were developed. On the basis of loan agreement analysis the authors elaborated a formula of monthly loan payments in occurrence of unfavourable period for the client of the bank.
As a result of the research authors came to a conclusion that in Latvia there is no legislation that directly regulates mortgage loans. Hence, in the author’s opinion, in order to promote responsible lending and borrowing in Latvia similarly as in Lithuania laws and regulations should be developed that would regulate the maximum possible amount of the loan depending on the market or purchase value of the real estate thus also levelling off the competition between local commercial banks and affiliations of foreign banks in Latvia.
During the research the authors also faced some restrictions, as not all banks in Latvia, which continue lending activities, are willing to give information included in loan agreements.
The research conducted by authors will be significant not only for the banks analyzed in this article, but also for borrowers, allowing them to make objective appraisal of loan agreement terms of each bank.
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