Businesses pay twice as much in interest on bank loans

Euros. Source: Alexandr Podvalny/Pixabay

Eurozone companies are paying up to twice as much in annual interest on their loans, owing primarily to the increase in base rates. Despite the fact that borrowing costs have risen by the same amount across Europe, it was already more expensive for Estonian businesses to borrow than in other European countries, due in part to the threat of war.

Bank of Estonia economist, Taavi Raudsaar, said that domestic banks lend to businesses at interest rates between 5 and 6 percent, while a year ago loans were still available with a 3 percent interest rate.

The base interest rates of central banks have also risen by the same amount.

The threat of war has a small effect on lending rates.

"Comparing the rates of government bonds provides some insight into this. Before the war, the difference in bond rates between Estonia and Germany was relatively small - 0.2 to 0.3 percentage points. At the beginning of the war, it went up to between 0.6 and 0.7. By the summer, 50 percent of this increase was gone.
As interest rates began to increase again, the gap also started to widened. We are still talking an effect of less than 0.5 percentage points. There will be an impact, but it will not be significant," Raudsaar said.

Raudsaar said that the interest rate gap between Estonia's and eurozone business bank loans is now nearly the same as it was before the war, i.e., borrowing in Estonia was more expensive than elsewhere in Europe even before the war.

The eurozone's average interest rate on business loans is 1.3 percentage points lower than in Estonia.

The loan's terms could also vary considerably depending on the loan's duration, size and lender.

Indrek Nuume, the head of corporate banking at LHV, said that while Estonian banks will continue to offer loans of a few million euros to firms, international banks will offer loans of a few hundred million euros.

"If the loan decision is not made in Estonia, the risk margin associated with our region, the Baltics in general, is included. It will be larger than a loan from the same Western European bank in Germany, for example. War-related events also have an impact on this margin," Nuume explained.

Geopolitical risk, Nuume said, has at least a 0.5 percent impact on credit.

Deposit rates have risen in tandem with the rise in base rates.

According to Nuume, banks recuperate the profits made on more costly loans to businesses through deposit interest.

"I have never seen portfolio quality as high as it is today in the previous two decades," Nuume said. ""On the one hand, we are experiencing an economic downturn, while on the other, deposit volumes are at all-time highs. In actuality, corporations have never been more capable of meeting their present commitments."

Despite this, Nuume tempered his confidence and said that caution was the order of the day.


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Editor: Merili Nael, Kristina Kersa

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