Consumer Lending in Lithuania: Was It Affected by COVID-19?
Recent statistics show that COVID-19 has had a significant impact on the real economy in many countries. Lithuania is not an exception: its GDP growth became negative; export and investments decreased, unemployment climbed up and wages were frozen. It’s evident that such trends significantly reduced household consumption.
Based on this, the question arises as to whether this has encouraged Lithuanian households to borrow in order to maintain the existing level of consumption, or, instead, caused an increase in savings and an aversion to borrowing?
Credit institutions experienced a decline in the consumer lending market
At the end of February 2020, just before the COVID-19 pandemic, the consumer loan portfolio for MFIs was close to EUR 778 million. Up until then, consumer lending in Lithuania had been increasing for quite some time. However, in March of this year, consumer lending started to see a decrease and dropped by 3.8% during the three months that followed. Subsequently, the situation stabilized and now the consumer loan portfolio is 4.5% lower, compared with February.
The flow of new consumer loans also decreased. From March to August 2020, there were almost 20% less than in the same period last year.
Similar trends were observed among alternative consumer credit providers. In H1 2020, consumer credit portfolios decreased by 9.2%. However, prior to COVID-19 they had also been increasing. When compared to the same period during 2019, new consumer loans decreased by 18.9%.
The consumer lending market was affected by demand rather than supply
There is evidence that COVID-19 has negatively impacted household credit risk. While it’s common in such cases to tighten lending standards, it seems that banks have done the opposite and decided to introduce less strict terms and conditions. During the COVID-19 pandemic, the maturity of consumer credit portfolios increased and interest rates went down. For example, average interest rates on the new consumer loans fell from 9.33% to 7.78% during the period of February through September 2020.
Therefore, it’s likely that a declining demand for consumer loans rather than the fall in supply drove the downward trend. It seems that in difficult times such as those we are currently experiencing, Lithuanian households have shifted their focus to saving and reducing their spending rather than borrowing to maintain the same level of consumption. The fact that the number of deposits significantly increased in H1 2020 and beyond also confirms this.
COVID-19 was not the only reason for the decline of consumer lending in Lithuania
However, it’s important to note that lower demand for consumer loans may be also driven by other factors, such as the country's macro-prudential policy. For example, in Lithuania, where these policy measures are very strict, even a small decrease in household income can lead to restrictions on the access to credit.
Statistics show that, although there were relatively few COVID-19 cases in Lithuania, the decline in consumer borrowing was relatively significant compared to other EU countries, which were much more affected by COVID-19.
There will not be any significant changes in the consumer lending market in the near future
Looking ahead, the situation in the consumer lending market is likely to stabilize. The results of a survey conducted by the Bank of Lithuania showed that almost half of households expect their income to remain unchanged, with only 13% predicting a decline. Approximately 35% of households are expecting their expenditures to grow , i.e. even 22 p.p. less than a year ago. The consumer confidence indicator, which reflects consumer expectations, is also beginning to show signs of improving.
Conversely, a significant recovery in consumer lending is also unlikely as there is still too much uncertainty regarding the future. Therefore, despite the challenges posed by COVID-19, for the foreseeable future, the stability in the consumer lending market is the most probable scenario.