Tightening of loan terms for businesses is levelling off

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The tightening of loan terms for Finnish businesses has come to a halt, experts reckon.
      Simultaneously the loan terms have remained tight compared to the time before the financial market crisis that started in 2008 and the subsequent recession in 2009.
      Drawing unambiguous and generally applicable conclusions with regard to businesses’ ability to obtain borrowed capital is difficult.
      This is because the size of businesses and therefore also their need for financing varies a lot. Furthermore, companies tend to seek for financing from varied sources.
      The sources of borrowed capital vary from bank loans and liability documents to the borrowing back of employee pension contributions.
     
According to the most recent figures published at the end of June, the amount of capital borrowed by companies in Finland totals EUR 99.1 billion.
      In a year the total amount borrowed by businesses has grown by 16 per cent, a Bank of Finland Financial Market Report from mid-December reveals.
      “Companies securities-based loans were in the region of EUR 26 billion. This is around ten per cent more than a year ago”, says Bank of Finland board member Pentti Hakkarainen.
      The amount of bank loans taken out by businesses was reduced exactly by five per cent from November the year before last, reveals a Bank of Finland report published at the end of December.
      On the other hand, the business loan stock’s average interest rate fell from 5.4 per cent to 2.4 per cent.
      The lowering of the interest rate reduces a company’s debt burden if the reference rate of interest of its loans is a market interest rate or if the loans have been renewed.
     
If interviews of euro area bank managers are used as an indicator, the tightening of loan terms would seem to have stopped, Hakkarainen estimates.
      “Compared with a couple of years ago the loan terms have tightened significantly, but further tightening has slowed down”, Hakkarainen adds.
      Sampo Bank director Aki Palo shares Hakkarainen’s sentiments.
      “The tightening of credit granting policies started in the spring of 2008 and continued in the autumn of the same year on a couple of separate instances, but not so much any more during 2009”, Palo says.
      In Palo’s view the tightening of the loan terms in the last couple of years translates to weakened prospects for some businesses to be granted loans as their solvency has declined in the recession.
      Sampo Bank’s business loan base in Finland is in the region of EUR ten billion, which translates to a 14% share of the business loan market, Palo explains.
     
“The situation seems to have eased off a little bit”, estimates economist Harri Hietala from the Federation of Finnish Enterprises.
      Hietala refers to the small and medium-size businesses’ economic trend outlook published in mid-December.
      According to the outlook, the price of financing, or the interest margin of companies’ business loans, is now a smaller worry than before.
      The tightening of the guarantee conditions is the real headache.
      According to Hietala it seems that companies have used up the guarantees accepted by the banks last year.
      If they now need additional financing, finding new collateral is not a given.
      Both Hietala and Palo are of the opinion that at the moment companies primarily take out loans to make sure they have sufficient amount of trading capital for the everyday running of the business.
      “Investments are nonexistent everywhere. Credit enquiries by profitable companies are at minimum. Some refinancing of existing loans is taking place”, Palo concludes.


Previously in HS International Edition:
  Autumn fall in interest margins on housing loans peters out (21.12.2009)

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  Bank of Finland

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