Increasing financing options for Peru's small and medium-sized enterprises

Since it took office in July 2016, the government has said that developing small and medium-sized enterprises (SMEs) is a key part of its economic strategy. Officials have noted that SMEs account for a large proportion of employment, but that their performance in terms of growth and productivity has been at best mixed. Many SMEs have experienced sluggish sales. Stimulating them to grow more vigorously and become more competitive is seen as something which would have a significant positive effect on the wider economy. An important part of the strategy is to encourage informal SMEs to formalise their activities, access credit and financial services, and enter fully into the tax and benefits system.

According to government estimates, only 35% of the SMEs currently operating in the country have accessed loans from either banks or from regional and municipal savings and loans cooperatives, known as cajas de ahorro. The aim is to increase that proportion to 60%, enabling the SMEs to raise their working capital and expand at a greater rate than they have in the past.

More Competition

Alberto del Solar, the head of SME banking at BCP, told local media in early September 2016 that by mid-2016 his institution had 470,000 SME clients and a 21% share of all lending to SMEs. He was expecting the financial system’s combined SME loan book to grow by 5.5% in 2016 and by 7% in 2017, reaching a total value of PEN35.7bn ($10.6bn) by the end of the second year. Just over half of BCP’s SME customers (52%) were located in Lima. The majority of the bank’s SME clients were active in the commerce sector (52%), followed by services (31%) and various types of industrial activity (16%). Del Solar said that the bank had been active in the SME segment of the market for over two decades. In recent years the segment had become more competitive, and SME customers in turn had increased their demands and expectations in terms of the services they expected to receive from the banks. BCP had therefore reviewed and updated its offer. It was now focusing on SMEs with annual revenues of between PEN360,000 ($107,000) and PEN5m ($1.5m), offering bespoke financial consultancy, a selection of financial solutions to meet their needs and the widest possible range of transaction channels.

Sme Support

While encouraging private bank lending to the SMEs, the government has also been seeking to offer more financing from state-owned institutions. Local press reported that as part of his economic stimulus measures announced in March 2017, Alfredo Thorne, the minister of economy and finance, said state-owned banks such as Banco de la Nación and Agrobanco would carry out additional SME lending, with support from the state development bank, Corporación Financiera de Desarrollo (COFIDE). COFIDE would centralise resources from various programmes aimed at supporting small and micro-enterprises into a single trust fund worth over PEN1.1bn ($326m). Loans would be made using this fund as collateral up to a multiple of three times the size of the overall fund, implying they would total up to PEN3.3bn ($978.1m). Thorne said the commercial banks charged higher interest rates on SME loans, which were perceived as being riskier, than on lending to larger corporations. To correct this, the government was seeking to leverage the financial system so that SMEs could get better access to credit at more favourable interest rates. There has in fact been some debate on whether market interest rates for SME lending have simply been too high. Asked about this in September 2016, Eduardo Torres-Llosa, CEO of BBVA Continental, told media, “When the first micro-finance lenders began to operate annual interest rates on loans were 140%. Five years ago they had come down to 47%. Today they are around 27%. Further reductions will depend on lenders: competition means business models are having to be rethought. But Peru shows that competition can help increase financial inclusion.”

There are some signs that the importance of SME lending for the commercial banks – and the importance of bank lending to the SMEs – may be subject to some changes. Some bankers say that if the economy now grows at a stable but lower rate than in the commodity boom years, SMEs will perform less strongly. Thus lending to SMEs may be slightly less attractive than other forms of lending, such as mortgages and consumer loans. In effect, the share of SME lending in the banks’ total loan book fell from 11% in 2015 to around 7% in late 2016. Seen from the other side, while the government wants to encourage bank lending to SMEs, it has a broader interest to integrate them into the wider financial system, a system that includes nonbank institutions. There have been signs that lending to SMEs by cajas de ahorro has been increasing.

Opportunities

The municipal-level savings and loans associations (cajas municipales de ahorro y crédito, CMAC) do see an opportunity to step up their lending to SMEs, and to a category known as micro and small enterprises. According to local press reports, Jorge Solís, president of one of these institutions, Caja Huancayo, expected that the reduction of cash-reserve ratios introduced by the central bank in December 2016 and March 2017 would allow some extra lending to micro and small enterprises. Currently around 73% of CMAC total lending is channelled to micro and small enterprises, according to the financial regulator, Superintendencia de Banca, Seguros y AFPs.

Solís, who is also president of the Municipal Savings and Loans Association (Federación Peruana de Cajas Municipales de Ahorro y Crédito, FEPCMAC) said that he expected lending to these organisations by FEPCMAC members to rise by 20% during 2017. “There are expectations of rising levels of private consumption in the country and that will stimulate commerce, and asset purchases and production of micro and small enterprises,” he told media. “These small companies are more resilient to macroeconomic problems because they have the capacity to reinvent themselves.”

According to the Lima Chamber of Commerce, CMAC lending to micro and small enterprises has grown by 32.5% over the last three years to reach PEN2.6bn ($770.6m). Of that amount one-third was being channelled to micro enterprises. While most banks do not cater to the needs of the micro and small enterprises, one of them – Mi Banco – specialises in microfinance.

Factoring & Listing

The Lima Stock Exchange (Bolsa de Valores de Lima, BVL) is also interested in attracting SMEs. According to Marco Antonio Zaldívar, president of BVL, one way the stock exchange can provide a useful service to SMEs is through factoring. At the end of 2016 an estimated total of 2000 SMEs had registered in the BVL’s factoring market, Registro Central de Valores y Liquidación del Peru, known by its acronym Cavali, which allows them to sell accounts receivable (invoices) at a discount. Using factoring allows small companies to improve their cash flow. “We are hoping the number will increase significantly in 2017, and to achieve that, we will be publicising the benefits of factoring and seeking to attract more investors prepared to buy these papers,” Zaldívar told local media. He believed that the number of SMEs registered in Cavali could rise to 10,000 by the end of 2017. The rate of progress could depend on the government’s success in its campaign to formalise SMEs and on the rate at which these firms incorporated new technology. This second point was important because the local factoring market was now largely based on electronic invoices. The BVL was also trying to persuade more SMEs to list on its alternative investment market, Mercado Alternativo de Valores (MAV). The MAV listing process, he noted, generated a business opportunity for the commercial banks. The stock exchange had found that after registration SMEs were taking an average of six months to issue their first shares on the MAV, and in that time gap they encountered cash-flow difficulties, solved in many cases by taking out bridging loans. He added that although interest rates on bridging loans were comparatively high, the banks could approve a loan application very quickly – usually within a week.