Why inefficient collateral enforcement makes loans more expensive in Latvia

Banks rely on collateral to limit losses when a borrower's business runs into trouble: with solid collateral, recovery from a distressed loan can reach half or more of the amount lent, whereas unsecured loans often yield little to nothing. The lower a bank's risk, the less capital it needs to hold against a loan, allowing it to offer better terms. Unlike venture capital investors, who can absorb losses on some investments because a single success can cover them, a bank only ever earns principal and interest even if a borrower thrives — but can lose a large share of the loan if things go wrong. This asymmetry means banks cannot take on investor-level risk.

Court efficiency also matters to banks because they must justify their credit risk decisions to supervisors, including the European Central Bank. When assets disappear or litigation drags on for years in even a few cases, banks factor that experience into future lending decisions — often resulting in higher interest rates, smaller loan amounts, or demands for additional security such as personal guarantees from owners.

Key problem areas

Industry representatives point to several areas needing improvement. The land register process is costly and slow, and many undisputed procedures could be handled by notaries rather than courts. Commercial pledge rules lack sufficient protection against dilution of a creditor's control, and the early stages of pledge enforcement need to move faster, since asset concealment can happen within days. Simplified company liquidation, while improved, still does not adequately protect creditors from a company effectively disappearing from legal circulation.

Progress has been made in debt recovery and insolvency, including new rental law provisions that make it easier to deal with problem tenants. Still, serious issues remain: actual recovery of claims against company board members is close to zero, and in some cases board members conceal their real financial standing by formally transferring assets to related parties. Mechanisms ensuring bailiffs can access pledged assets also remain insufficiently effective.

Overall, banks issue loans based on an assessment of a borrower's cash flow rather than an intention to seize collateral, but the cost of enforcing collateral and pursuing litigation determines the price of that risk. A more efficient system would mean lower credit risk and broader, cheaper financing for businesses and households.