Evaluation of the borrower’s creditworthiness as an important condition for enhancing the effectiveness of lending operations

Abstract

In this research, analyzing the difficulties of efficiency of commercial banks’ credit operations, the author has paid special attention to such issues like the process of management and assessment of borrowers’ creditworthiness, as well as formation of credit portfolio in unsteady conditions of economics. The main risk of formation of commercial bank’s credit portfolio is made up of the credit risk. In the present situation in Latvia, when during the pre-crisis years the commercial banks dramatically increase the volumes of their credit portfolios, the basic challenge for them is balance of profitability of credit portfolio and quality. Here, if the mechanisms of the market self-regulation do not function, only efficient supervising system can help. Latvia is one of the first countries of the Eastern Europe, which has a united institution of supervision of financial and capital market being established and having commenced its work, which is also a step into the direction of development, safety and stability of the credit market. Analyzing the formation of the credit portfolio of the Latvian commercial banks in the unsteady economical circumstances, researching the statistical data of the Bank of Latvia and the Financial and Capital Market Commission, the author has made conclusions that during the crisis period both the physical volume of credit portfolios o the Latvian commercial banks and their quality and profitability have decreased, together with rapid increase of the volume of overdue credit payments. In this situation the author would recommend paying special attention to more efficient management of the quality of granted credits without materially decreasing the volume of credit portfolios themselves. In its turn, in order to efficiently manage the quality of granted credits, one has to use the results of the local researches, not relying particularly on the foreign researches, which refer to the conjuncture of other markets, specific nature of other economics and other time.