CG impact on bank lending in Latvia

CG impact on bank lending in Latvia

Corporate governance practices are given up to 25 percent of weight in company credit ratings assigned by the largest banks operating in Latvia, shows an analysis carried out by the Baltic Institute of Corporate Governance (BICG).

Results of this analysis were presented in a discussion How does corporate governance impact on attracting funding?, organised together with the association Finance Latvia in Riga last week, aiming to raise awareness of governance pre-conditions for companies that want to attract funding for further development.

Based on the data shared by Swedbank, SEB, Citadele, Luminor and Baltic International Bank, impact of corporate governance practices on the company credit rating is 10 to 25 percent.

„Thereby poorly governed companies will be subject to higher interest rates or will have to ensure higher own contribution, with a more intensive monitoring and control regime by the banks, such as being required to submit more regular reports, discuss financial plans more frequently, receive consent for certain investments,” says Andris Grafs, Vice President Latvia of the BICG.

In assessing the allocation of funding for company development, banks are evaluating not only company’s finances and business plan, but also focusing on such corporate governance related aspects as who owns the company, what is its ownership structure, operational experience and reputation, and how professional is the management team.

„By assessing company governance, integrity in the broader sense of it becomes an essential criteria. This includes attitude towards the state and the payment of taxes, attitude to laws and regulatory norms, relations with the company’s creditors, clients and suppliers, potential corruption risks, shareholder relations and other aspects,” notes Karlis Danēvičs, member of the Management Board of SEB in Latvia, co-chair of the Credit Committee of Finance Latvia and member of the Board of the BICG.

Banks also assess how a company makes operational and strategic decisions, how transparent it is, what is the quality of information it provides, how risks are governed and what relationship approach is applied to business partners.

“One of the significant conclusions is also that if a company’s development plans fail, if crisis and corporate disputes accelerate, very often the root of the problem comes directly from the company governance model. For example, in such cases when it is not possible to track down who and how take strategic and operational decisions in a company,” says Andris Grafs.

The criteria applied vary from bank to bank.