At the beginning of the year, the Financial Policy and Regulation Board resolved to set the new active interest rates for the first quarter of 2023. Of the 13 segments, only two (business productivity and corporate productivity) increased and the rest remained unchanged. ranges. This, unlike what happens in the rest of the world where interest rates have gone on the rise.
Rather than being good news, this setting of rates (which is done without taking into account the behavior of the market) has raised alarm from both bank representatives and experts, who warn that low rates, at a time when funding for the Financing has increased internationally and locally, they will generate a credit restriction by 2023 and, therefore, financial exclusion.
The fixing of rates, which is the modality in which the cost of money is established in Ecuador, for several years has already generated significant financial exclusion and this year the problem would continue to deepen.
Why does this happen?
At higher rates, there is a greater incentive for banks and cooperatives to lend money to higher-risk customers. At a lower rate, the incentive is reduced and banks prefer to lend to people with lower risk.
According to Alberto Acosta Burneo, editor of Weekly Analysis, interest rate ceilings prevent financial institutions from granting credit in higher-risk operations. So, since 2007 the number of private bank operations fell, while their average amount rose. This means fewer credits, but higher volume. Another way of saying it: “more money in fewer hands”. There are several facts that prove it:
- In the 2007-2019 period, the number of operations decreased by an annual average of 0.6%, while the average amount increased by 10.1%.
- Between January and November 2022, while the amounts placed increased 22% year-on-year, the number of operations grew only 9%, and the number of clients 7%.
- Other evidence is the behavior of microcredit, whose average amount has almost quadrupled. In 2008, retail credit had an average amount of $300, while today it exceeds $1,000.
What are exclusion and financial repression?
For Alberto Acosta Burneo, the Board’s policies that sought to benefit less favored groups, keeping rates low, end up leaving out people seeking lower volume credit, but with a higher risk of collection. This, in a nutshell, is financial exclusion.
In turn, this behavior ends up promoting the return to the chulco of those who are left out of the formal bank. This phenomenon is known as financial repression. The cost of financing in the chulco can reach an average of 4% daily or up to 1,200% annually with daily payment conditions in most cases. (Equifax, August 2021). “This shows that the problem of access to credit in Ecuador is not the rate, but the regulations that distort the supply of credit,” says Acosta.
About the topic, Marco Rodríguez, executive president of the Association of Private Banks, confirms that in Ecuador the ceilings that have the maximum active rates do not reflect the current conditions of the economy and they are provoking credit crunch in all segments. This phenomenon is taking place, “especially in the productive, business, SME and microcredit credit segments, aggravating the situation of some of those segments that were already affected by financial exclusion since the limits and ceilings on interest rates were established, in 2007”.
Secondly, the cost of local funding has also increased. The referential passive interest rate -as of January 2023 of the financial system- reached 6.65%, more than one percentage point above the previous year.
The increase in the cost of this financing makes it difficult for a significant flow of new resources to arrive in the country to fund new credits.
The Monetary Fund has also made a reflection on interest rate policies and it has indicated that credit to the private sector will slow down in 2023 to 7.2%, that is, it will register a decrease of 5.8 percentage points. “It can be foreseen that in 2023 credit will be less available, especially in those segments whose interest rate ceilings limit their offer,” the agency said. The IMF country report indicates that “The tightening of global financial conditions could translate into an increase in interest rates in Ecuador and in the presence of ceilings, credit rationing would occur, harming financial inclusion.” The IMF is in favor of the relaxation of roofs which would allow an adequate assessment of credit risk. (YO)
Source: Eluniverso
Paul is a talented author and journalist with a passion for entertainment and general news. He currently works as a writer at the 247 News Agency, where he has established herself as a respected voice in the industry.
