Every day more voices of alert are heard about the possibility of the gestation of a financial bubble in the MYPES segment in Peru, as a result of the credit risk associated with the risk of over-indebtedness, understood as the “level of indebtedness in the financial system that, for its excessive nature with respect to income and ability to pay, puts at risk the repayment of the obligations of retail debtors ”(Resolution SBS N ° 6941-2008).
However, in order to have a medium clarity as to whether or not such a phenomenon is actually incubating, an analysis of the episodes of over-indebtedness in recent times would have to be carried out, to identify behavior patterns and look for their correlation in current reality.
In view of this, a review of the cases of over-indebtedness has been carried out in countries, such as: Bolivia, Bosnia and Herzegovina, Morocco, India and Nicaragua, in order to identify its causes, effects, warning signs and, of course, the actions that were adopted for its solution.
BOLIVIA
After an accelerated growth of microfinance in the 1990s, a crisis broke out between 1999 and 2000, as a result of the incursion of consumer credit institutions in the microfinance market, under the commercial hook that said: “If you are a good microfinance client, come to us. We will give you a bigger loan and you will get it faster. "
Urban clients took advantage of the quick and easy offer of credit to access several loans from different entities, having one or more loans in force at the same time.
Situation, coupled with a context of: a) existence of a highly competitive microfinance market, but with little penetration in hard-to-reach areas, b) excess liquidity in the microfinance system, which pressured placement, c) information not shared by the regulated and unregulated financial sector (Credit Unions, NGOs, etc.) and d) a recession due to external shocks; originated the over-indebtedness of the sector.
To control the situation, the Superintendency of Banks and Financial Institutions (SBEF) issued regulations in 1999 for the placement of consumer credit. However, those were issued too late and failed to prevent excessive indebtedness at various financial institutions.
Between 1999 and 2000, BancoSol and PRODEM lost 25% and 45% of their clients, respectively.
BOSNIA AND HERZEGOVINA
Like Bolivia, after a significant growth in microfinance registered between 1998 and 2007, the collapse occurred in 2008 and 2009, after the international financial crisis exposed the deficiencies of a saturated microfinance sector, which faced with competition of the sector: over-serving borrowers and exceeding individual guarantees of employees (European Fund for Southeast Europe).
MOROCCO
At the level of the Arab world, it is the undisputed leader: it has 40% of clients and has some of the best performing Microfinance Institutions (MFIs) in the world.
In the period from 2003 to 2007, the loan portfolio multiplied by 11 times and the number of clients by four, counting at the end of 2008, with one million clients and assets of US $.705 million.
The surprising growth of the portfolio concealed the deficiencies of the system, which came to the fore with the international financial crisis, which began in December 2007.
The causes of the over-indebtedness crisis include: a) unsustainable growth of the loan portfolio, b) concentration of loans in large cities, c) increase in non-performing loans (consumption), d) lenient credit policies, e) obsolete information systems for management, f) lack of internal controls, g) mismanagement, h) offering large loans with poor guarantee policies, i) changing weekly to monthly installments and j) the increase in shared clients.
The crisis caused delinquencies to go from 0.42% in 2003 to 1.9% in 2007, then to 5.00% in 2008 and to 10.0% in June 2009, increasing penalties in an extraordinary way.
In a research study conducted in 2008, it was concluded that 40% of delinquencies could be attributed to easing of the credit methodology.
The responses implemented by the sector to counteract the crises were: a) the supervisory entity promoted the mergers, to avoid the contagion effect, b) the MFIs slowed their growth considerably, generating an unprecedented cash position, c) a plan was implemented aggressive recovery, d) credit processes became stricter, e) the exchange of credit information (with other MFIs) became weekly, to control cross-financing, and f) shared clients decreased (from 39% to 29%, from October 2008 to September 2009).
INDIA
Its epicenter was in the State of Andhra Pradesh (AP), where microfinance started in the country.
The crisis originated in 2010 and was sparked by "tabloid newspapers with accounts of the suicides of over-indebted clients of some of India's largest microfinance institutions", along with rising debt stress among thousands of clients.
According to studies carried out, the internal factors that contributed to the crisis were: a) high growth in saturated markets (without taking into account the customer's ability to pay), b) the size of loans, c) multiple loans, d) lack of product diversity and e) growth "at the expense of personal-customer interaction."
As a counter-crisis measure, the Andhra Pradesh state government issued an ordinance severely restricting lending.
As a result of this restriction, as of March 2011, the cost per borrower increased by 33% compared to the previous year, the operating expense ratios increased by 14.3% and the Portfolio at Risk> 30 days increased from 0.67% to 25.5% nationwide (given that AP was a prime location for microfinance loans in the country), leaving India with one of the worst microfinance portfolio qualities in the world.
NICARAGUA
The Nicaraguan microfinance crisis is one of the most spectacular cases of confrontation between MFIs and delinquent clients, backed by the Sandinista government at the time, as a tactic of political opportunism.
At their peak in 2008, Nicaraguan MFIs had an annual loan portfolio of US $.560 million, covering slightly more than half a million clients, or 22% of the economically active population. At the international level, Nicaraguan microfinance thus became one of the most recognized and publicized microfinance success stories.
Nicaraguan microfinance had an atypical characteristic compared to microfinance in the Latin American continent, since it included an important credit portfolio for agricultural production and - in particular - credit for cattle; when typically the majority of Latin American microcredit is urban and goes to small merchants.
In 2008, serious disturbances in the domestic market, as well as a client rebellion, hit Nicaragua's microfinance sector. In several regions, clients began to refuse to pay their loans and the number of delinquent clients increased rapidly.
Among the causes of the crisis were: a) excess liquidity due to international financing, which temporarily concealed the deficient management of credit risk, b) pressure to place the surplus, which stimulated the phenomenon of multiple loans and debt recycling; where old debts, often problematic and costly, were paid off with new and larger loans, particularly in the saturated sectors of small businesses and services and c) problems of saturation in the market, mainly in certain urban areas and for personal loans of consumption.
COMMON ELEMENTS
From the evaluation of the previous cases, it is summarized that the determinants of over-indebtedness can be grouped as follows:
Due to the behavior of the MFIs themselves
- Due to rapid institutional growth, without correlation between the areas of control. Due to lax policies in the granting of credits. Due to bad credit evaluation (quantitative, qualitative and destination of the credit). For inadequate credit products (very short terms, very frequent installments or standardized products that do not match the flow of each borrower).
Due to factors external to MFIs
- Adverse external shocks (international financial crisis, fall in commodity prices, weather events, etc.) Political factors. Pressure from power groups. Excessive influx of foreign capital and excess liquidity. Lack of financial education (the lower, the higher the number of over-indebted borrowers).
LEARNED LESSONS
- In mature and increasingly competitive markets, MFIs must balance their growth objectives with portfolio quality. Risk centers, the more timely the information, the better. Mapping of access to financing with geographic and socioeconomic information on the penetration of microfinance services in order to identify underserved and saturated markets. Regulation and supervision of the MFI, in order to avoid predatory credit practices (through control of the purchase of debts and the establishment of a maximum number of financial entities).
SYMPTOMS AND ALERTS OF OVERLOADING
- Deterioration in portfolio quality (delinquent portfolio and high-risk portfolio) High degree of portfolio write-off, which is assumed by high rates, but affects the market. Accelerated increase in shared clients and decrease in exclusive ones (not necessarily over-indebtedness, but alert). Accelerated increase in the average credit balance in the same clients. Recurring reduction in the number of clients and the volume of the portfolio (it is being taken away by the competition). Concentration of the financial offer in the same customer segment in some territories (urban area).
PERU
Having said the above, we should ask ourselves if these symptoms or alerts are really observed in Peru, which could give rise to the risk of over-indebtedness.
For this purpose, the data of the Superintendency of Banking, Insurance and AFP - SBS, for the period December 2010 - July 2015, of the credits granted to the micro and small business segment - MYPE, in the Banking System, Municipal Savings Banks, Savings Banks Rural, Edpymes and Financieras. The information on the Savings and Credit Cooperatives System could not be included because it was not available on the FENACREP portal.
The information obtained was the following:
Evolution of the Balance of MYPE Loans
As of July 31, placements in the micro and small business segment amounted to S /.8.43 billion and S / 22.32 billion, respectively; registering a growth of 9.4% and 60.1%, compared to the end of 2010.
However, it can be seen that year after year, growth slows, to the point that the increase in loans at the end of the previous year was just 0.22% and 1.64%, respectively, with a contraction in July of -2.4% and -1.24%, respectively. Situation that would indicate a depletion of the market that is currently being addressed.
At the Municipal Savings Bank level, a similar behavior is observed: growth of 20.29% and 73.34% in the period Dec 2010 - July 2015, an increase of only 2.13% and 6.96% at the end of 2014 and a contraction of -0.35% and growth of 3.15% as of July 2015, respectively.
Evolution of the Number of MYPE Clients
At the end of last July, the number of clients in the micro and small business segment had an increase of 18.49% and 56.22%, compared to the end of 2010, with the exception that the shared clients between types of financial companies, so their growth would be lower.
As in the behavior of loans, there is a brake in the growth of the number of clients, with an increase of only 0.98% and 1.03% at the end of 2014 and a reduction of -0.08% and -1.10% in July past
At the Municipal Savings Banks level, something similar happens: growth of 18.32% and 66.14% in the period Dec 2010 - July 2015, an increase of 1.17% and 5.88% at the end of 2014 and growth of only 1.75% and 2.47% as of July of 2015, respectively.
Evolution of Average Credit Balance
As of July 2015, the average balance of loans in the micro and small business segment amounted to S /.4.5 thousand and S /.43.2 thousand, amounts similar to those observed at the end of 2010
Situation that is repeated within financial companies.
However, since the shared clients between types of financial companies are not refined, the average balance could be higher, Evolution of the Overdue Portfolio
The arrears portfolio (overdue loans + loans in judicial collection) of the micro and small business segment shows a greater deterioration year after year, having risen from 4.48% and 5.11% in December 2010, to 5.42% and 9.66% in July 2015, respectively.
The situation is similar in Banks, Municipal Savings Banks, Rural Banks, Financial Banks and Edpymes, with a default in the micro and small business segment of 4.02% and 10.07%, 6.30% and 8.88%, 7.67% and 9.02%, 5.84% and 9.65 % and 5.52% and 6.85%, respectively.
Evolution of the High Risk Portfolio Ratio (CAR)
If we add the refinanced and restructured to the delinquent portfolio, we find that the high-risk portfolio ratio of the micro and small business segment increased from 5.99% and 7.22% in 2010 to 6.29% to 12.05% in July 2015.
Something similar happens within Banks, Municipal Savings Banks, Rural Savings Banks, Financial Institutions and Edpymes, with a CAR in the micro and small business segment of 4.58% and 12.60%, 7.55% and
11.24%, 8.72% and 12.38%, 6.62% and 11.29% and 6.02% and 8.12%, respectively
Evolution of Punishments
The amount of written-off loans in the micro and small business segment rose from S /.219.86 million and S /.464.60 million, respectively, in December 2011; to 304.10 million and 1,025 million, respectively, in December 2014.
If we take into account the penalties of the micro and small business segment with respect to the total portfolio, we find that they also registered growth, rising from 2.49% and 2.56% at the end of 2011 to 3.40% and 4.34% at the end of the year 2014.
Evolution of the High Risk Portfolio (CAR) without penalties.
Finally, if we add penalties to CAR, we find that the real ratio of impaired portfolio in the micro and small business segment rose from 7.51% and 9.58% in December 2011 to 7.83% and 13.79% in July 2015
At the level of Banks, Municipal Savings Banks, Rural Savings Banks, Financial Banks and Edpymes, the real ratio of impaired portfolio in the micro and small business segment amounts to 6.33% and 14.98%, 9.13% and 12.29%, 11.28% and 13.42%, 9.91% and 13.33% and 7.47% and 8.97%, respectively.
Evolution of Shared Clients
According to the Analysis reports of the Peruvian Microfinance System of the Risk Classifier Equilibrium, in the period from December 2012 to September 2014, the number of shared clients in the Municipal Savings Banks rose from 39% to 61%; in Rural Savings Banks, from 45% to 59%; in Edpymes, from 51% to 57% and in Financials, from 34% to 63%.
Worrying situation, since credit growth is observed in the same clients.
CONCLUSIONS
From the analysis of the variables, the following is observed:
- Decrease in placements in the MYPE segment. Reduction in the number of MYPE clients. Maintenance of the average MYPE balance. Increase in the number of shared clients. Deterioration of portfolio quality. Increase in write-offs, both in balance and as a percentage of the total portfolio. Increased growth in the small business portfolio. Further deterioration in the small business portfolio.
To which should be added:
- Concentration of credit in urban and peri-urban areas Flexibility of credit policies, especially in the purchase of debts. Wrong evaluation parameters in the financing of loans for working capital. Excessive pressure towards portfolio growth. Migration of credits from microenterprises to small businesses, not because of business growth, but because of the amount of debt.
Therefore, it can be concluded that there would be a risk of the gestation of a financial bubble in the MYPE segment unless the MFIs adopt growth strategies with portfolio quality, identify new underserved markets, do not relax their credit policies and the supervisory entity Take a position of greater control. Nothing impossible, if the will exists, of course.
Author
Ivan Lozano Flores
Manager of the Banking and Microfinance Training Center - CEFOMIC
Editor of the website: www.elanalista.com [email protected]
RPM: # 949864499
Related links:
- POLICIES AGAINST THE RISK OF OVER-DEBT http://www.elanalista.com/?q=node/234 A NEW RATIO AGAINST OVER-INDEBTEDNESS http://www.elanalista.com/?q=node/230 OMISSION OF DESTINATION ON CREDIT AND OVER-INDEBTEDNESS IN MICROFINANCE http://www.elanalista.com/?q=node/201 WHY IS NON-DEFAULT IN SMALL BUSINESSES SO HIGH? http://www.elanalista.com/?q=node/244 MFIs SHOULD NOT PLACE CREDITS TO MEDIUM-SIZED COMPANIES http://www.elanalista.com/?q=node/245 MICRO AND SMALL WORKING CAPITAL FINANCING COMPANIES https://www.youtube.com/watch?v=J2MfX0YEwq0
