In October, Latvijas Banka released a study on financial accessibility, and Latvia appeared poorly among the European Union countries. Meanwhile, a couple of years ago, Industra Bank announced that it would focus more on lending and support Latvian entrepreneurs. Is the planned strategy successful?

Lending to businesses is our core business; our bank shareholders are entrepreneurs themselves, so we understand what is crucial for entrepreneurs and what they expect from a bank. We embody their vision. We are still a small bank, but our ambitions are large! In the beginning of October this year, we had already issued twice as many loans as in the entire previous year. Next year, we plan to issue 50% more than this year. Our primary task was to organize processes, automate those where human touch is not crucial, so we were not as visible in the market. But we will make ourselves more and more heard, targeting businesses planning investments but unable to secure funding from large banks.

What are the challenges in this process? Scandinavian banks claim that businesses do not qualify; they still have a lot to do in terms of transparency. Smaller businesses also find it challenging to meet all the requirements to get a loan.

After the previous financial crisis, large banks changed their lending policies, placing them in very tight frameworks, and they have been operating this way for more than a decade. It is their chosen business model - offering relatively low-interest rates against low credit risk. The operating model for large banks is similar, and it is clear that the capital allows it – they could increase the volume of lending. But there are only as many strong and financially powerful companies as there are.

Those companies already have the money; they do not need...

Yes, some do not need it, but even large, well-established companies cannot develop solely with their own funds; bank support is always necessary.

And then there is us... there is the big four banks, and there is us - smaller, more flexible, with greater manoeuvrability. We do not plan to compete with the large banks; we work in our niche, and for us, it is business lending. We are ready to take a slightly higher risk for a slightly higher cost, but we are much more flexible for the client.

We are ready to take a slightly higher risk for a slightly higher cost, but we are much more flexible for the client.

How much is a slightly higher cost?

On average, one to two percentage points higher. As shown by the Latvijas Banka financial accessibility report, many companies do not apply for financing in any bank, even though they need it, and it could be available. Some already assume from the beginning that everything is bad, and those loans will not be approved, why to go to the bank and embarrass themselves.

And there are companies that apply to large banks, get rejected, and stop there. I do not know if it is a lack of information or a perception issue. But life doesn't end there! In Latvia, there are still a number of smaller banks that can offer loans with competitive terms.

Maybe they don't apply for a loan to save time and already scarce resources, rather than because of possible embarrassment?

It is possible, but avoiding seeking for financing doesn't solve anything. If a manufacturing company needs to buy new equipment, but it does not go for a loan to the bank, it will eventually lose competitiveness and go bankrupt. You can't save money for years to develop with your own capital because during that time, competitors will already be ahead. You need to look at the bigger picture. In Latvia, there are more than four banks! You need to go and try. Moreover, it doesn't require a huge time investment - with us, a company will receive an initial credit assessment answer within two working days. In Latvia, there is also much discussion about alternative sources of financing, such as the capital market, but these are poorly developed yet. In recent years, I have observed positive trends in the popularity of bond issuances.

With us, a company will receive an initial credit assessment answer within two working days.

What do you offer that characterizes your mentioned flexibility?

In addition to the mentioned speed, it can be smaller own financing for the project, longer loan repayment terms, repayment schedules specifically tailored to the client, deferred payments, and so on.

And there is also one essential difference – as a rule large banks assess only the financial data of the last year. Future forecasts are requested, of course, but they are not really considered. We are willing to analyse future prospects more, take more risks, and trust them. For small and medium-sized enterprises (SMEs) in large banks, everything is very standardized, and the human touch seems has disappeared at some point. We, of course, also keep up with the times; much is digitized, much is done remotely, but the client, the entrepreneur, can meet their manager or bank management in person.

Has there ever been such a human touch?

There has been. However, the differences in business models and the change in customer paradigms need to be considered. Objectively, by transforming business models, large part of the processes has been automated, in the name of increased efficiency.  And not all clients are interested in this individual in-person conversation. They receive appropriate digital solutions at a good price and are satisfied. While our niche is the companies with more complex needs or those who value the on-site advise and a personal approach.

Although it hasn't been a long time since you actively started financing SMEs, perhaps you have already analysed the initial results. Does the risk pay off?

In my opinion, this business model has been chosen absolutely correctly and has already proven itself. Since we have resumed lending, loans issued in the last three years have not incurred losses. Despite the increase in interest rates, the quality of the loan portfolio has not deteriorated. There are individual cases where we have adjusted schedules for clients, and there are also clients who have chosen to repay the loan ahead of schedule.

Doesn't the law set any requirements for starting loan repayments? If you adjust a special schedule with deferred payments for the client, isn't that considered a bad loan?

No, that is not considered a bad loan. We offer individual repayment schedules based on the project's cash flow and the client's preferences, and it is a normal practice.

Returning to the published financial accessibility overview - what do you think is the reason for the current situation?

The truth is somewhere in between. It is a story about both supply and demand, as well as uncertainty about the business environment. The fact that clients are not always active and ambitious enough in making investments and strengthening export capabilities is also a fact.

But regarding the supply - companies have somehow focused specifically on the big four, but as I mentioned before, there are more than four banks in Latvia! They need to be more open, not giving up after the first refusal, to be bolder to approach other banks, and if that doesn't work, look for alternative financing options.

For example, there is a product called factoring. Currently, Industra does not offer it, but perhaps in the future, we will. In my view, it is a very good product for financing working capital, essentially financing invoices without collateral. For some reason, it is used very little in Latvia. In Estonia, factoring’s turnover is three times larger than in Latvia, and in Lithuania, it is five times larger, even though the economies of these countries are not three or five times larger than Latvia's.

I needed it once, looked into it. A contract is required for every invoice! If they are not regular customers, you do not sign a contract for each invoice...

Classical factoring is suitable when there is a long-term business partner (buyer) to whom invoices are regularly issued with deferred payment. A tripartite agreement is concluded, and the buyer pays the invoice to the financier's specified account. If buyers are not regular, there are creditors who offer financing for individual invoices.

How do you evaluate the current regulation of banks? We have undergone a capital repair, but isn't it the case that regulation also affects the situation, and in this regard, we are moving from one ditch to another?

As for regulation - both we and the market as a whole still spend significant resources and energy, for example, in researching client funds. If funds are credited to our bank's account from another financial institution supervised by the Bank of Latvia, the law does not allow us to consider it as audited and safe. Of course, the energy spent on this could be used more efficiently, including in the direction of lending. It is strange that when purchasing government bonds, there is no obligation for the state to verify the money coming from banks. Double standards?

There are initiatives that we, as a bank, have proposed, and the regulator promises to take them into account, such as the amount of capital to be spent on loans secured by real estate. Regulation also determines the administrative burden and affects how easy it is for new competition to enter the market.

Returning to lending and daily services - who is your main customer now?

We have around 1,500 companies and about 19,000 private individuals among our clients. However, the focus is specifically on companies because we cannot and do not want to be a large, universal bank that does many things at an okay level. We want to be experts and leaders in a specific segment. Financing companies is our focus. Yes, we serve a relatively large number of individuals, but that is not our main strategic direction.

Nineteen thousand people - that is still a lot.

Yes, it has come historically, the number of individuals increased, also taking over Privat Bank. Some of the private individuals are the owners, management and employees of the companies’ that we serve.

Do you follow what industries the companies represent?

We do not specifically categorize by industries; we have a quite diverse customer base. Manufacturers dominate, but this year we have started actively supporting farmers. There are also traders, service providers, forestry businesses, and real estate. We, like other banks, are cautious about construction because it is a cyclical industry.

Isn't that the most stable industry? In a crisis, the state builds everything. When there is no crisis, it still builds, just much more expensively.

I wouldn't say that. The problem is that the state lacks a long-term strategy in construction. The state could support the industry more purposefully by building public facilities when it is in a downturn.

Now sustainability is in vogue. What is considered sustainable in the banking sector - the companies you finance or something else? What is the practical side of this question?

It's not just a trend; it's the new reality. We, as a bank, divide sustainability into two parts - direct impact, how sustainable we are ourselves, how we consume resources, and what our processes and habits are. For example, the digitization of document circulation that we implemented two years ago. It not only saved a few birches but also significantly accelerated processes and made more efficient use of employees' time. Another direct impact is that we, from the first days of the war, open accounts and issue payment cards to Ukrainian refugees who have found safe haven in Latvia for free and in a simplified manner.

Then there is the indirect impact - what we finance and to whom we give money. Whether it's an office with a BREEAM certificate, is it a car fleet without CO2 emissions or other green projects.

But you still grant loans to others?

We do, but at some point, we will come to measuring the bank's loan portfolios by the volume of emissions. Loans for sustainable projects are already cheaper in the banking market.

Of course, not all customers are thrilled about it. It is much simplier with large, international companies.

There may also be customer pressure.

Yes, absolutely! They may not choose a particular supplier if it does not meet certain sustainability criteria. And this trend is spreading.

Has all this already entered in a big way, or is it entering rapidly, gaining momentum? How much of your loans can be considered sustainable?

I would say - it is still coming to our bank. We are not yet sorting whether the loan is sustainable or not, but in the long run we will not avoid it either. We already record and collect this information within the know your customer process. But let me be frank - looking at the Latvian banking sector, we are certainly not leaders in sustainability. Larger banks started looking at this issue earlier, and it is quite accurately worked out in the materials of their clients. Sustainability analysis for loans and clients above certain amounts is already a mandatory requirement.

I assume that for SMEs, it might be challenging to fully understand what the story is about...

Of course, it could be a case, and at some point, it will create the need for additional involvement, attention, and resources.

Let's talk about innovation in the bank - new products, digitization. How is Industra Bank coping with that?

One thing worth mentioning is the Commercial Activity Income account (in Latvian – SDI konts). It is an account for self-employed individuals, designed for micro-enterprise tax payers. The idea is - when a Commercial Activity Income account is opened in the bank, the tax payment occurs completely automatically, there is no need for any reports or declarations anymore. Simply put, from all the income that enters the account, the relevant tax amount is automatically deducted and transferred to the state budget. From the bank's point of view, it might not seem interesting - a €15 account opening fee and €5 monthly maintenance. But we looked at it from another perspective, fundamentally - we want to show small and medium-sized businesses that someone still remembers them. We invested in developing this product, and so far, we don't regret it.

When opening a Commercial Activity Income account at the bank, tax payments are processed entirely automatically, eliminating the need for any tax reports or declarations.

Of course, the number of self-employed within our customer base is not large at the moment, a few hundred, but it is gradually growing, and if the state approves the proposals that are currently being evaluated in the Saeima for a single tax rate, then the number of potential clients will increase even more, and we will be happy for it. 

Talking about news - we introduced the vPOS mobile application this year. It is a full-fledged POS terminal that allows our clients to accept card payments, replacing the physical POS terminal device. We just introduced a mobile bank. We are keeping up with time to offer our clients convenient solutions.

We are also working on introduction of remote customer acceptance, meaning customers can become clients remotely, without coming to the bank. We are still refining the details, but we will offer it very soon. We do have branches in regions, but not in all cities, so it might not be convenient for new clients to travel. In this regard, we are uniquely positioned among small banks - we not only have branches, but they are also outside Riga: in Liepaja, Ventspils, Jelgava, Daugavpils.

How is it going there? Are people coming?

People are coming, there is activity. Primarily, we serve individuals there, but companies also use branches in the regions, and it is very significant that we are present there. It is especially essential for individuals, particularly seniors, who we have many historically, and sometimes they come just to talk. Both individuals and companies appreciate this opportunity.

Can they afford to maintain an account in a small bank?

It is a myth that it is expensive. The account maintenance for individuals costs one euro per month in our bank. For companies, the cost is higher, especially if there are some specially tailored solutions. It must be acknowledged that the individual touch costs more, but our clients appreciate it and are willing to pay for it.

How do you see the development prospects for banks in the next, let's say, five or ten years?

I think after the next generational change, there will be a big digital explosion in the world. The perception of what a bank is for today's youth is significantly different from the perception of older people.

Isn't this explosion happening now?

It is happening slowly, but it has not happened yet. Once a bank was an institution with thick walls, safes, associated with security, but now the situation is changing. I think if you asked young people now if they would be willing to keep their funds in, let’s say, Google or Apple accounts, most would say yes because they are huge international companies, and the youth trust them.

Changes will undoubtedly occur. Will branches disappear? I don't think so; they will still exist for specific matters. Regarding Latvia - I would like to see a sufficiently large local capital bank grow in Latvia that can compete with American and Scandinavian capital banks. As for us - of course, we have such ambitions to grow and develop, but we develop from profits. Everything goes into new loans, into development. Such organic development will take years. It is possible that at some point, we might consider an IPO to develop faster.