I have received a few questions on whether I am suggesting this is the beginning of an actual Peruvian microfinance meltdown, and should clarify my stance on this.
Basically, I don’t know.
The signals are inconclusive. But when we look at previous crises (Bolivia, Morocco, Nicaragua, Andhra Pradesh, Pakistan, Bosnia etc.) there are certain triggers, or catalysts, that seemed to push a serious situation over the edge. They differ from country to country, and people have criticised my Peru piece on the basis that “Peru is not Nicaragua”. I totally agree with such critics, Peru is most certainly not Nicaragua, but that does not imply that there is nothing to learn from the Nicaraguan crisis, or any of the others. Obviously if many of the similarities in previous crises emerge in Peru, this would be cause for concern. So, what are some of these alarm bells, and do they apply in Peru?
Andhra Pradesh is perhaps the most publicised microfinance crisis to date. The broad accusation was that loan officers applied extreme pressure on defaulting clients that forced some clients to suicide. Whether or not these claims are valid, there is no evidence (that I am aware of) that this is occurring in Peru. The principal threat to non-repaying clients appears to be black-listing on the credit bureau and an inability to obtain more credit.
If anyone knows of cases of violence or humiliation used by banks against Peruvians, please send me the evidence.
All crises have over-indebtedness in common, and there is certainly sufficient evidence already to suggest this could be a problem in Peru. I have spoken to some funders over the last days, and opinions are mixed. As a broad rule, those with more money invested in Peru believe this is less of a problem, perhaps unexpectedly. I cited two reports in the original post supporting the fears of over-indebtedness. These are both somewhat out-of-date (the situation has likely worsened since they were written) and exclude the endless other sources of debt, formal or otherwise: cars bought on credit, those store cards you can get in Lima shopping centres in about 5 minutes, credit cards etc.
There are various definitions of over-indebtedness, and prior to the Nicaraguan crisis there was no clear consensus. I remember, I was there. But why is delinquency rising in Peru? Why have professional and experienced banks such as MiBanco been unable to control this? Why did they lose 100.000 clients last year? Why is this delinquency happening across the entire country rather than just at one or two troubled banks? We are fast approaching a situation when 1 in 10 Peruvians with loans are unable to meet their monthly repayments – think about that for a moment. No one wants to default on a loan, these people are cutting back their expenses, economising where possible, working harder, draining their savings, perhaps selling personal possessions, and are simply unable to meet their monthly loan repayments. Suggesting that this is not a cause for concern simply because the entire sector hasn’t yet collapsed seems a naïve stance to me.
Some Peruvians are in dire trouble, and we need to limit the extent to which this happens rather than suggest that it is not yet occurring to enough people to cause a systemic crisis.
Nicaragua was triggered by civil unrest. So far there has been no animosity against the banks, but there have been protests against the mining companies. This triggered the “no pago” movement in Nicaragua, as banks over-charged clients and tried to imprison non-repaying clients, which naturally irritated their families. There is no evidence of such behaviour so far in Peru, but it is not inconceivable. However, look at the interest rates some of them are coughing up, this could easily cause poor clients to rise up against their so-called benefactors. The 3 highest I have found so far, according to page 52 of the December 2012 COPEME report, are:
- CMAC Del Santa 203.11%
- CRAC Sipan 157.26%
- Edpyme Inv. La Cruz 233.48%
Another potential trigger is the withdrawal of investors. We have seen this with BlueOrchard, and I have spoken to one fund who makes a similar claim but has been unable (or unwilling) to provide me with tangible evidence that it has reduced its exposure to Peru. Perhaps in a later blog I will examine the individual portfolios of a few funds to see if this is the case, but most funds are extremely non-transparent in revealing where they have invested, so this is not so easy.
An additional alarm bell would be depositors withdrawing their savings from the banks as they lose faith in them as guardians of their scarce savings. The evidence in the case of MiBanco is mixed. It actually has increased the number of depositors, but each depositor now holds a reduced balance. The overall effect in 2013 was a 1.7% decline in the total deposits held at MiBanco, which is not indicative of a run on the bank. But then again, the bank was only recently put up for sale, so it will be interesting to see the latest data to confirm if this remains the case.
Another alarm bell would be disconcerting action taken by the regulator. If investors perceive the regulator as making adverse moves that could harm their earnings, this could prompt investors to leave. If the regulator does nothing the situation is unlikely to improve. If the regulator offers overly-generous client protection (in the eyes of the banks and their investors) this could also trigger the departure of investors. What about an interest-rate cap? The Economist Intelligence Unit specifically praises Peru for NOT having such a cap (“The lack of an interest-rate cap, reasonable capital requirements and the availability of various legal structures create low barriers to entry” – register for free to download report). Most MFIs charge relatively reasonable rates, but even preventing interest rates of over 100% might be a wise move, as such loans inevitably lead to strife. And if either the investors or the general public perceive that the regulator is worried about the situation, this could trigger an investor exodus or a run on the banks as clients attempt to rescue their savings in the expectation of a possible crisis – also not ideal.
So actions of the regulator are also indicative of the likelihood of a crisis, but could themselves trigger a crisis, it’s a fine line. And Peru’s regulator is not in an easy position currently (although one could argue that it was the same regulator who allowed this current situation to arise).
Obviously the collapse of a major bank would be a serious alarm bell. The cajas are in trouble, MiBanco is in trouble, ACP Is in trouble – this is not entirely inconceivable. Collapses of institutions are often euphemistically described as “consolidation”, but is the collapse of a major MFI in Peru really that unlikely?
And of course, there are many other signs of a crisis looming. This is a brief blog post. Do we see these in Peru? Yes, some of them, to some extent. Does that mean a crisis is imminent? No, but it does mean we should keep our eyes peeled for more signs, and make concerted efforts to avoid a crisis, rather than keep going along the same trajectory with our eyes closed. Let’s learn from previous mistakes.