Domestic credit portfolios are likely to continue growing in 2025, driven in part by several large credit agreements in the non-financial corporations (NFC) sector concluded at the end of last year and the beginning of this year, according to the Bank of Latvia’s Financial Stability Report.
The report explains that as interest rates gradually decline, domestic lending has significantly accelerated. The pace of lending has improved in both the household and NFC sectors. As of March 2025, the annual growth rate of total domestic lending to NFCs and households reached 7.8%, including 8.4% for NFCs and 7.3% for households.
However, after a prolonged period of weak lending, the ratio of bank credit to gross domestic product (GDP) remains very low. At the end of 2024, the credit-to-GDP ratio for NFCs and households was just 29%. This indicator remains considerably higher on average across the euro area, including Estonia. While the gap with Lithuania is less significant, it is slowly widening.
The report states that insufficient credit support for investment and a sluggish investment climate are long-standing and systemic issues. This is particularly pressing given the urgent need for large-scale investments to renew the housing stock, increase resilience to climate and other natural risks, and strengthen national security.
The Bank of Latvia notes that
current NFC lending is significantly driven by medium and small banks, most of which are domestically owned.
Although loans issued by these banks currently make up a relatively small share (20% as of March 2025) of the total domestic NFC credit portfolio, their contribution to lending growth exceeds that of the five largest banks, all of which are foreign-owned.
Corporate debt levels are low, there is a lack of competitive pressure in lending, and major banks maintain conservative lending policies. Thus, the increased activity of smaller banks is viewed positively. While interest rates from smaller banks are still higher than those from larger banks, the difference has narrowed, enabling loans to a wider range of risk profiles.
Housing lending continues to be significantly supported by the government’s home purchase guarantee program. After a decline in previous periods, the program’s role in new loan volume growth increased again in the second half of last year and early this year, with more than 40% of new loans issued under the program. As of March this year, loans with state guarantees made up 37% of the outstanding housing loan portfolio.
The report notes that
further improvements to the program are necessary to ensure more targeted state support.
Primarily, it is important to prevent inefficient use of the program’s funds, as some borrowers apply solely to benefit from reduced land registry registration fees. To reduce this incentive, the Bank of Latvia proposes introducing a lower (0.5%) state fee for property registration in the land registry for all families with children.
The volume of consumer and other non-mortgage household loans continues to grow significantly, stabilizing at around 10% annually. These loans still represent a relatively small share of the overall household credit portfolio and are no longer growing substantially. The report suggests that the increase in these loans may be due to greater issuance of loans for home renovations and energy efficiency improvements — there has been notable growth in larger new loans exceeding €10,000. Unlike secured mortgage loans, these loans have much simpler access conditions, increasing their use.
The domestic credit portfolio is expected to continue growing in 2025. In the NFC sector, growth may be driven by several large credit agreements concluded at the end of 2024 and early 2025, though funding had only partially or not yet been disbursed as of March. Household lending is expected to continue growing moderately, supported by falling interest rates and the strong financial position of households. The 2024 Solidarity Contribution Law, which allows credit institutions to receive a discount if their loan portfolio grows beyond legal thresholds, could incentivize banks to increase lending.
However, lending will be constrained by uncertainty and caution due to external trade and geopolitical risks, as well as ongoing structural challenges.
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