Julio Velarde, President, Central Reserve Bank of Peru: Interview

Interview: Julio Velarde

How will the reduction of reserve ratios in soles affect the de-dollarisation of the economy?

JULIO VELARDE: We have lowered reserve requirements for sol-denominated deposits from 20% in May 2013 to 6.5% at present. Through this policy we have injected close to PEN13bn ($4.15bn) into the banking system to facilitate the expansion of credit in domestic currency. In the future we will probably continue to reduce reserve requirements in soles, even though the impact of this policy may be smaller, particularly for banks that require high levels of operational liquidity. However, it does have an effect on many individual institutions. Other reserve requirement measures aim to accelerate de-dollarisation, which were introduced in 2013 and helped banks to coordinate a reduction in the stock of dollar-denominated loans. We established additional reserve requirements for financial institutions that did not achieve a 10% reduction in their stock of dollar loans by December 2015 relative to the September 2013 stock.

Moreover, tougher measures have been introduced in the mortgage and car loan segments to reduce dollar-denominated loans to a fraction of the total. Additional reserve requirements in dollars apply for those banks that do not attain a 15% reduction in dollar loans relative to the February 2013 stock. These additional reserve requirements have reduced credit dollarisation. In 1998 dollar-denominated loans made up 91% of total loans, while as of September 2015 they were just 30% of total loans. By limiting the negative impact of depreciation on bank asset quality, this reduction in credit dollarisation has made the financial system less vulnerable to exchange rate volatility.

A key factor that contributed to the successful implementation of the de-dollarisation measures is that the dollar is expected to strengthen. When the dollar was expected to depreciate against the sol, the policies we are now implementing, which increase the cost of dollar lending by local banks, would have caused companies to seek other sources of dollar funding, such as debt from foreign banks or issuances in capital markets. One of the consequences of the strengthening dollar is the dollarisation of deposits at the same time as banks are de-dollarising loans, creating an excess of dollar liquidity in the financial system. To avoid potential problems with currency mismatches, the central bank has been using repurchase operations (forex swaps) to provide long-term domestic currency liquidity taking as collateral excess dollar liquidity.

What measures can be taken to shield the financial sector from currency mismatch risks in sectors like construction and manufacturing?

VELARDE: There has been a significant increase in corporate debt issued in dollars in the past few years, particularly in 2012, consisting of seven-to-10-year bonds. This is not a pressing issue for the financial sector at present, but we should focus on the debt issued by companies that do not earn dollar revenues. It is important to ensure that when those bonds are due in 2020-22 they do not put stress on liquidity and funding conditions within the banking system, to avoid affecting other banks’ clients.

What policies can be implemented to stop non-performing loan (NPL) growth while maintaining dynamism in the microfinance sector?

VELARDE: NPLs in the microfinance segment are not as high as they are for small and medium-sized enterprises. An important consideration is that conventional banks have entered the micro-credit segment, which was previously reserved for specialised small financial institutions. Therefore, the greater participation of banks has contributed to higher quality in this segment. This in turn has raised expectations that NPLs will decrease in the short term, and we can expect lending to these segments to grow.