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Friday 22.11.2019 | Name days: Aldis, Alfons, Aldris

Tverijons: banks declare war against «shadow» economy

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The Association of Commercial Banks of Latvia President Teodors Tverijons

Companies suspected of shadow bookkeeping and balance sheets not in order will have difficulties in getting loans from banks.

The Association of Commercial Banks of Latvia President Teodors Tverijons told in an interview to BNN. He also invites entrepreneurs not to rely on such a business model that provides basing development only on loans saying that in the post-crisis Latvia the model will not work any more.

He also notes that soon many companies’ names that have made use of money laundering scheme services will be announced publicly. T.Tverijons is convinced that there are well-known and large companies of Latvia among the ones that have used the scheme’s «services».

Do you think borrowers’ – physical and private entities – way of thinking has changed? Do people who have experienced the crisis now consider more carefully what they can afford and what not? Will people be more cautions after the economy is back on the «track»?

The life obliges them to adjust. But I do not exactly know about physical entities.

Speaking about businessmen…

I believe that they will understand that their way of thinking has to alter as well. The philosophy of attitude of how to build your own enterprise has to change. It is not right that a company is developed only on the basis of lent money. From the point of view of business, commercial loans are meant to help to solve short-term problems – for credit current assets or loans for making small adjustments in cash flow etc.  also for small projects implementation.

When speaking about serious development, a credit cannot replace actual investments, as serious development can only take place on the ground of investment. For example, in structural funds projects calling for European Union (EU) cash acquisition. On the other hand 50 or 60% is formed by money from structural funds and the rest 40% is formed by an entrepreneur’s personal investment. One has to invest also his or her own personal capital; however knowing that many do not have it at all – currently the most popular method is to found a limited liability company (Ltd.) with the starting capital of two thousand lats stock capital and get the rest of the money by obtaining a loan from a bank. These business projects are very well developed, this is not the problem. The problem is that a million lats worth project simply cannot be supported only by a bank’s money – the businessman himself not running any risk. If the project does not succeed, everything is lost, including the EU and the bank’s money, yet the most responsible person, the promoter of the project loses only his idea and two thousand lats.

What is the difference between loans and investments?

As a result both investments and loans ensure the necessary financial resources for the project’s development. The difference is that, in case of a loan – the bank is the investor. Unfortunately there are no investment banks in Latvia providing such services. In other words there are no financial institutions operating as investment funds or banks that enter a deal not only with its financial resources but also as the supervisor whose share and contribution in the company is much more extensive. That way the investment bank bears the same responsibility as the founder of the idea. The essence of crediting is that banks issue loans and later on they only focus on receiving regular payments. The bank is forbidden to interfere with the development of the project, except when there are specific restrictions, contracts or some special case. Only in the case of actual investment, we discuss more serious development. Therefore investments and in general how to attract them is a very important matter to consider.

And not development based on loans?

Exactly, but this is only one aspect of the issue. The other is that enough time has passed and entrepreneurs, who are not working for the first year, should concentrate on stabilization of their own capital. Of course, there are companies that invest or place a considerable part of their profit on increasing their capital. However, there are also enterprises diverting profit to dividends or using it simply to rise their welfare. Considering the level of welfare, many Latvian businessmen reached the living standards of their colleges from the West a long time ago. What I mean is their lifestyle with expensive houses, sophisticated cars and yachts. Many of our businessmen reached the European average level of living standards many years ago. But we are currently reviewing our clients – the numerous companies’ balance sheets and the amount of their own capital. There is no doubt, this figure is far behind the European Union’s. Banks have learnt a very serious lesson and they will base their future decisions on this bitter experience. Businessmen should understand that further on, banks, when issuing credits will consider the company’s equity and the company’s book value more seriously. Those wanting to start their own business, the so called beginners, will not have problems in borrowing through government support programs. It will not be difficult to get medium size loans, yet the greatest problems will arise to those who will not have learnt from the crisis. Companies with balance sheet and stock capital not in order will fail in getting a loan. There are very many companies whose balance sheets actually do not reflect the real situation.

Do you mean the so called «double bookkeeping»?

It is exactly what we are talking about. The shadow economy must have grown out from somewhere. What is clear is that those who practice shadow economy and companies involved in this will also have serious difficulties in obtaining bank’s finances. I believe that soon interesting information about Latvian enterprises will become public. Last year as well as this one, the Financial Police has identified at least 20 money laundering groupings. The group did this «business» for a living. But enough with the crime. The most interesting will come when trial begins, investigation ends and we will finally get to know the users of the «service». The society, except for me, will be very surprised when it turns out that many large and well-known Latvian companies are among the users of this kind of crime. Therefore reputation will also matter for crediting. Companies with dubious reputation will face serious problems in the loan issues.

But speaking about the shadow economy, banks are approached by companies wanting to borrow. Banks certainly have broad access to companies’ balance sheets. Banks already have some idea who are those companies which practice «double bookkeeping», or are using your mentioned schemes’ services…

There is no doubt banks know that. Sometimes it is even enough to take a single figure from one paper, another figure from another paper, put them together and you see that they simply do not «match»… and then you start questioning. Discovering this is very easy for professionals. Similarly as a doctor can say what the matter with his patient is considering his symptoms, banks often see what actually is going on as well. Much depends on the client, if he is stubborn in his lies or not. If he goes on lying, it is clear that the bank will not issue the loan.

Really, banks know this very well, they know information they cannot spread publicly due to stipulations of the law. Banks are forbidden to provide any information regarding clients’ transactions; yet at the same time clients themselves are not prohibited anything – the can say whatever they want.


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