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Bank of Estonia: Repaying loans might become a little harder

Bank of Estonia.
Bank of Estonia. Source: Siim Lõvi /ERR

While the share of bad loans remains very low in Estonia, a recent analysis by the Bank of Estonia (Eesti Pank) suggests their number will start to grow as a result of rising unemployment and falling sales revenue.

While difficulties repaying loans might be a serious problem for individual households, the central bank does not forecast major setbacks for the financial sector or the economy as a whole thanks to preexisting buffers, the Bank of Estonia finds in its recent financial stability overview.

The share of problematic or bad loans has been falling steadily for both home and corporate loans. In early 2018, 1.4 percent of business loans were in arrears for over 60 days, while this had come down to just 0.3 percent by this September. The indicator fell from 0.4 percent to 0.1 percent for home loans during the same period.

The Bank of Estonia now forecasts the situation to start deteriorating slightly as the Estonian economy has been struggling for some time. The economy is not estimated to bounce back quickly as Estonia's main export partners aren't doing well either and the competitive ability of Estonian companies has fallen. Unemployment is also on the rise.

The overview also points out that increased competition between commercial banks to attract fixed-term deposits has resulted in people keeping their money in fixed rather than demand deposits.

While banks' capital buffers remain strong, they have fallen somewhat in recent years. The Estonian tax system has motivated banks to pay out annual profits since 2018. The banks also recently announced plans to pay out even more of their profits over the coming years to which step political pressure has contributed.

Capital buffers are necessary to cover possible loan losses and continue issuing loans to people and companies also during difficult times. Even though Estonian banks' buffers remain robust enough to cover greater-than-anticipated loan losses, planned dividend payments are set to undermine capitalization and crisis resilience, the Bank of Estonia writes.

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Editor: Huko Aaspõllu, Marcus Turovski

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