Risk and return

Patricio Quintanilla Paulet, rector of U La Salle

A basic principle of finance is the relationship between risk and profitability; Every profitable operation has a risk and as the first one is greater, so will the risk we assume.

This week we received the news that the Superintendency of Banking, Insurance and AFP (SBS) has intervened nine savings and credit cooperatives, all of them for having negative equity; let’s see what this means.

Negative Equity

Every company has three components in its financial situation, the asset, made up of the availability of cash, the accounts receivable for credits to its clients and, if applicable, the merchandise; It also has a liability, which are the debts it has, be it with the public, banks, taxes, etc. The third component is equity, which is owned by the partners and is the difference between assets and liabilities.

Negative equity, means that the debts of the company are greater than its assets; Thus, if all its assets were liquidated, it would not be enough to pay the debts. In the case of financial institutions, which include savings and credit cooperatives, the main debts are with their savings partners.

Therefore, what you have in the asset is not enough to return the deposits received.

Risk and Deposit Insurance

The financial system has a Deposit Insurance Fund, which covers institutions regulated by the SBS, for up to 112 thousand soles, but savings and credit cooperatives are not included, so their depositors are assuming the risk of insolvency, without having this insurance.

In most cases, people who operate with this type of institution is because they offer a higher interest rate (profitability) than others such as banks, savings banks or the like and, in part because these clients assume that they have the same security, not receiving complete information at the time of delivering your money.

Many of these people have deposited their life savings, money from their social benefits, perhaps a small inheritance, which unfortunately will not be received in full when the liquidation concludes.

conclusion

The management of a family’s resources must be very careful because in many cases it is the future sustenance for them; For this reason, security should not be risked for greater profitability, because in the end everything can be lost.

Before making a decision, we must carefully evaluate the financial institution, its solvency and whether it has deposit insurance.

Making a decision only for the interest rate they offer is taking a risk that can be high. Let’s not forget, Risk and Profitability.