Ecuador: Interest Rate Caps Forcing Microlenders to Increase Loan Amounts
Santiago, Chile, May, 06 2010 -
The tightening of interest rate caps by Ecuador's central bank (BCE) is pushing microlenders to increase the average amount of their loans, and may give some no choice but to sell their portfolios to larger institutions, Red Financiera Rural (RFR) executive director Javier Vaca told BNamericas.
Since the government enacted a banking reform allowing the central bank to set a maximum interest rate for banking institutions in 2007, the cap for microlenders has been dropping, Vaca said.
Last weekend, the central bank reduced it again to 30.5% from 33.9% for retail microlenders, and to 27.5% from 33.3% for others.
"The global credit portfolio is still growing, but the number of clients isn't growing at the same pace," Vaca said. "[Lenders] are placing larger amounts with clients that already have loans."
Vaca said the four bank microlenders in the market have increased their average lending amount to US$2,500 from US$1,500, while co-op loan amounts have risen to US$3,500 from US$1,800.
Smaller lenders, meanwhile, like the 15 NGOs in the market, have increased their average loan size to US$600 from an average of US$200.
Vaca said that while the co-operatives might still have some flexibility, the NGOs will suffer the most because of the smaller loan size they focus on.
Meanwhile, banks and other financial institutions get a large portion of their credit from abroad at relatively high rates. Further reductions in the interest rates they can charge to clients will mean they will have to either continue increasing the size of the loans they grant or sell their portfolios to larger institutions with lower fixed costs, Vaca said.
"It raises the risk that people needing small [loan] amounts will no longer be served," Vaca said.
LOOKING FOR CLEAR RULES
Vaca said his organization, which has 40 microlenders as members, is reaching out to central bank officials, seeking to explain to them the plight of the country's microlenders.
"What the institutions want to know is what the government's policy is going to be," he said. "It's not clear and there is no technical formula where one can make a projection on where the interest rates will be in the coming months."
Ecuador's micro credit market is dominated by four specialized banks, 15 NGOs, 40 large co-ops regulated by banking regulator (SBS), and about 1,200 smaller, unregulated co-ops, Vaca said.
The credit portfolio of the microfinance sector is worth approximately US$1.5bn, according to Vaca.