Several analysts explain what the possible scenarios are, and on what factors a decrease in the cost of money depends
Until December 12, the new Financial Policy Board must approve the new interest rate calculation methodology that will govern the country. This, after the Monetary and Financial Board gave it -through Resolution 676 2021- a period of 60 days, from its possession (on October 12), to approve said methodology, which as is known has already been designed by the Central bank of Ecuador.
The imminent announcement of the new rates brings to debate the feasibility of lowering rates versus the reality of the cost of money. According to analysts, the new methodology, which the Central Bank has said would be based on bands (lower ranges for people with the lowest risk and higher for the most risky), helps financial inclusion. However, more structural changes are required to generate better performance. All agree that the rate setting system that was applied since 2007 has generated less access to credit, especially for microcredit sectors.
Weekly Analysis presented last Tuesday a complete study on the consequences of having applied the methodology of maximum ceilings for interest rates since 2007.
According to the study, between 2007 and 2019 the number of credit operations decreased by 0.6%, on an annual average, while the average amount in dollars rose by 10.1%. This means that higher average amounts of credit were granted, but the number of operations was reduced in the commercial, consumer, microcredit and housing segments. Alberto Acosta Burneo, editor of Weekly Analysis and who worked on this study, explained that ultimately “the ceilings that were set on interest rates caused financial exclusion.”
He expressed that it is wrongly understood that rates can be set at the will of governments and that the kinder and good it is, the lower the rate and if it is a bad government they would be higher. However, the reality is that the cost of money depends on several factors.
The interest rate has several components that determine its price: the preference or not for the savings of a society, the more liquidity, the lower the cost of the rate; The risk of the environment and of each client is also a factor that is taken into account, while the third is related to the expectation of inflation.
In this sense, Acosta Burneo argued that a new methodology can help improve the rate system, but to lower them, various structural reforms must be carried out. Although in Ecuador there is a plus that is dollarization, which generates low inflation, achieving a reduction in interest rates requires a modernization of banking legislation so that it reaches international standards. Ecuador currently does not meet the Basel standards. Openness to investment and international financial competence are also required. However, there are now significant restrictions on international investment in the banking system. One of them is the 5% tax on the exit of foreign currency (ISD).
He also suggested streamlining liquidity requirements that exist by law in the country. This limits the ability to extend credit because of every $ 100 received, only $ 84 can be loaned, Acosta Burneo said.
Marcos López, an economic analyst and who was part of the defunct Monetary and Financial Board, affirmed that the Bank will not be able to make the methodology public yet, until the Financial Board approves it. He considered that a good methodology should seek the financial inclusion of those who do not have access. This is only achieved when the rates adequately cover the risks of the money that belongs to the depositors.
He explained that so far an interest rate setting system has been operating and what has happened is that financial institutions have made use of the ceiling, as this has allowed them to make a kind of cross subsidy. In other words, those who could have a lower rate are charged more expensively, to compensate for the lower rate that could be charged to those who have a higher risk.
For López, what would be achieved with the gang regime is that people without access to credit can be included, but with higher rates. Instead, those with a better record may see lower rates.
He added that it is important to have greater liquidity, but it must be longer-term and not short-term liquidity like the one that banks now have. For this reason, he said that the repatriation of capital, proposed in the Economic Development Law, could generate more liquidity and longer term.
López argued that there is no risk that all banks will go to the roof of the bands, because there the competition begins to work. Having the tolerance to collect the various risks, he estimated, people who did not have access will now have it.
Meanwhile, Patricio Chanabá, executive director of the Association of Microcredit Financial Institutions (Asomif), announced that his sector is expectant about how the new methodology will come. He said that they have participated in some meetings and have been able to deliver their criteria to the authorities.
For Chanabá, the vision they have of the new methodology is that it be technical and that it does not generate distortions such as those already generated by the setting of rates, when access to microcredit was lost.
He affirmed that if these rates do not cover the costs, then what is produced is a lower delivery of credit. He asked that the importance of financial inclusion be considered and for this take into account that giving smaller amounts is more expensive for the system.
When asked if people can expect lower rates, he explained that this is the permanent discrepancy that exists between the aspiration of society and the cost of money. In any case, he considered that the Government could seek mechanisms to subsidize rates, through public banks. (I)
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