Latvia's new insolvency law shifts responsibility to banks

RIGA, July 26 (Reuters) - Latvia passed a new insolvency law on Monday aimed at setting limits for how long people can remain insolvent, a move that a top official said would shift more responsibility to the country's banks.

Latvia's banking sector is dominated by Nordic players. Swedbank, SEB, Nordea and DnB NORD lost 700 million Latvian lats ($1.3 billion) during the economic crisis in Latvia due to write-offs on loans which went bad when the economy went into a downward spiral.

Latvia pledged to introduce new insolvency laws as part of an agreement with the International Monetary Fund and European Commission to secure loans under a 7.5 billion euro bailout at the end of 2008.

The head of the Latvian parliament's economic affairs commission said that the new law would shift more responsibility to banks when it came to making people insolvent.

The new legislation determines how much of the debt can be written off and sets a time limit on how long a person can be deemed insolvent, depending on how much of the debt is paid after the person's possessions are sold. The terms last from one to 3-1/2 years. Under current legislation, a person has to pay all the debt, no matter how long it takes.

'It will stimulate the interest of banks to seek other solutions ... so that insolvency stays as the last option,' parliament commission chief Vents Armands Krauklis said in a statement issued after the bill was passed.

FKTK, the banking sector supervisor, said on Monday that by the end of June banks had restructured loans worth 2.9 billion lats ($5.28 billion) or 19.6 percent of their total loan portfolio.

The total amount of credit delayed by more than 90 days in June accounted for 19 percent of the loan stock.

SEB bank said in a statement that the new law was a compromise solution and would likely affect the way banks make loans, by requiring borrowers to put up more of their own funds in the future.

According to Latvian Banking association data, 120 individuals are going through insolvency procedures and 80 of them have had an average loan of 425,000 lats.

(Reporting by Aija Braslina; Editing by Susan Fenton) ($1=.5494 Latvian lat) (Riga newsroom, [e-mail], [phone]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.