Why inefficient collateral enforcement makes loans more expensive in Latvia

In an opinion piece, Uldis Cērps, chairman of the Finance Latvia Association, explains why the efficiency of collateral enforcement directly shapes loan pricing in Latvia. He notes that banks lend based on a borrower's ability to repay from cash flow, not merely because collateral exists — but collateral becomes decisive once that plan fails.

The faster and more reliably a bank can enforce collateral when problems arise, the lower its credit risk, meaning less capital is required per loan and better terms can be offered to clients. Unlike venture capital investors, banks cannot offset losses with outsized returns from a few successful deals, since they only receive principal and interest.

Cērps points out that banks must justify the risks they take to supervisors — for Latvia's largest banks, the European Central Bank. When court proceedings drag on for years or assets disappear during litigation, this experience shapes future lending decisions, resulting in higher interest rates, smaller loan amounts, or demands for personal guarantees from owners.

Problem areas in Latvia

The author highlights four areas needing improvement. First, the land register, where many procedures could be handled by notaries instead of courts, and fees still impose significant costs. Second, commercial pledge regulation, including creditor protection against capital dilution and unclear creditor priority. Third, simplified company liquidation, where creditor protection remains insufficient. Fourth, debt collection and insolvency, where progress has been made, but recovery from claims against board members remains close to zero, and cases exist where board members' actual solvency is concealed.

Cērps concludes that more efficient collateral enforcement does not mean giving banks more power, but rather reducing credit risk and enabling more loans on better terms for businesses and households.