Play it cool: New rules aimed at slowing lending activity have been introduced

Consumer lending – whether in the form of loans, credit cards or mortgages – has surged over the past few years, contributing to the rapid rise in loan portfolios at Peru’s banks. While the ratio of non-performing loans (NPLs) is still moderate both by historical and regional standards, it has risen slightly over the past year, prompting some analysts to ask whether Peruvian banks had been too aggressive in their drive to acquire more customers and boost penetration.

To address these concerns, the central bank and the regulator, the Superintendency of Banking, Insurance and Private Pension Funds (Superintendencia de Banca Seguros y AFP, SBS), have instituted several changes aimed at cooling the credit expansion. Regulators stress that the changes are not the result of large-scale macroeconomic problems. Instead, the new rules are aimed at keeping what is already seen as a prudent and relatively conservative banking sector in line.

Credit Expansion

As of June 2013 growth in consumer lending and credit cards topped 11.6% and 7.8%, respectively, year-on-year (y-o-y), lower than the banking sector average of 15.1%. Home loans were also on the rise, increasing by 24.7% y-o-y as of June 2013.

Expansion of this magnitude is not entirely out of the ordinary given the context. Peru’s GDP has increased every year since 2001. The country is home to a rising middle class, and only around 30% of the population makes use of formal credit. Still, Guillermo Arbe, chief economist at Scotiabank Perú, told OBG that central bankers become “a bit nervous” any time loan growth exceeds 20%. Perhaps these concerns are not unfounded. While the NPL ratio for home loans remains low, at around 0.94% as of July 2013, the rate of non-performing credit cards loans stood at 4.53% as of December 2012. For Peru’s largest bank, Banco de Crédito del Perú, the NPL ratio for credit cards rose from 3.7% in September 2011 to 5.5% in August 2012.

Regulatory Response

The regulatory authority has responded to these recent trends by increasing provisions for bad loans, although banks have some time to comply with the new rule, with a deadline set for July 2015. Capital requirements on bad loans have also been raised. As of November 2012, business and consumer loans that are more than 90 days in arrears receive a credit risk weighting greater than 100%.

The SBS is also increasing capital requirements on loans that exhibit exchange rate risks. The rule would apply to loans where the customer earns income in nuevos soles and has borrowed dollars. Alberto Morisaki, the deputy manager of economic studies and statistics at the Peruvian Banking Association, explained the reasoning behind addressing exchange rate risks: “The SBS does not want people to get into long-term consumer debt in a foreign currency. If banks are forced to put up more capital to offer a loan in dollars, they will raise the interest rate to compensate for this,” which may in turn encourage banking customers to seek loans in nuevos soles instead of dollars. At time of press the SBS had published the new rules related to increasing capital requirements for assets that pose a credit risk, and was accepting comments until July 8, 2013.

Mortgages

The SBS has also targeted home loans, issuing new regulations in November 2012 that introduce a system of risk weights that takes into account factors such as the loan-to-value (LTV) ratio, whether it is a first home, the currency of the loan and its length of term. For example, a fixed-rate mortgage in nuevos soles for a first home with an LTV ratio of less than 90% that has a residual maturity of less than 20 years and a registered guarantee is assigned a risk weighting of 50%. However, if this same loan is in dollars, its LTV must be below 80%, or its risk weighting goes up to 100%.

While NPL levels on mortgages remain fairly low, the main motivation behind this weighting system is to ensure that banks hold greater capital for loans that could be more risky, such as those in a foreign currency or with a high LTV ratio. These types of loans are not very common at present, but the rise in costs imposed by this regulation will help to ensure that they do not become more prevalent at times of higher liquidity.