Navigating the Challenges of Family Credit: The Importance of Effective Regulation and Tools.

The match Town meeting presented a new bill to resolve the situation of thousands of small family debtors that have been left in Cessation of payments and disabled to rebuild its financial situation before the market. It is a good starting point to delve into the situation of the credit and the challenges that arise to improve access to it, so important for so many families. From now on we can say that the project has good intentions but bad proposed tools.

He credit market of families is massive and has grown in recent years, although the pandemic and previously the difficulties of growth in the economy had moderated its impulses. It is estimated that close to 90% of families take creditboth direct from companies and through plastics (cards).

According to data from the consulting firm Exante, the stock of credit to families As of March of this year, it exceeded $9.7 billion, of which almost 3,400 million dollars correspond to mortgage credit, almost 500 million dollars to automobile credit and more than 5,800 million dollars to consumer credit, both personal loans and credit cards. The figures cover both banks and credit companies.

Criticism of credit often turns to questioning the high interest ratesbut this can be misleading: AERs are financial calculations that assume balances are reinvested at the same rate, which is theoretical. It is very good to inform the rate (it is mandatory) and the lower it is, the better, but to better evaluate the dynamics of loans, amounts and terms must be incorporated. And there is no doubt that loans have solved problems for thousands of families.

It is always desirable for credit costs to fall and everything indicates that there are sufficient levels of competition for this to tend to happen. The problems seem to be more relevant in the regulatory blueprint: a family that takes a loan and -for whatever reason- has a payment problem, becomes delinquent and the regulation of the Central Bank of Uruguay (BCU) forces the credit company to forecast and downgrade.

It is logical that the regulation acts like this, but it must be adapted because the majority of debtors who have a circumstantial problem have willingness to repay and often manages to put the situation back together. Likewise, several of the companies that have been working in this market for years incorporate this and seek to maintain the credit relationship, which is ultimately their business.

In fact, last year the BCU changed a “drag” rule It has people’s credit ratings. The rule establishes that if the debtor is category 5 (the lowest) in a bank, it cannot have a better rating in others. Starting last year, small debts were excluded from this regulation ($10,000 limit) and this improved the position of many debtors.

This -obviously- does not “erase” the debt, but it allows to maintain access to credit in other banks. It is an example that there are possible changes to improve the situation without going to laws that subvert contracts. The bank regulation It has to be robust, but a mortgage or business loan is not the same as a monthly consumer loan.

Another particularly glassy issue is the role of companies who buy debt portfolio (obviously at a discounted price), and then go for collection in an aggressive manner and without further regulation. This must also be resolved: debtor harassment is shocking, beyond the fact that borrowers have to face responsibilities.

To resolve debts, the Open Town Hall project goes the other way. establishes a two stage mechanismon the one hand a conciliation stage at the level of the Consumer Defense Unit, and then a judicial instance if there is no agreement in the first.

From my point of view this does not solve the matter, and can complicate it: It is known -due to prior history- that any debtor who has entered into a judicial reconsideration of his debt (which in this case would be mandatory by law) is affected in his ability to take credit for a long time. It happened at the corporate level decades ago with the big refinances, and it would happen again now.

that’s the way it is there is an opportunity for improvement in a key issue such as credit, which can be associated with a better financial inclusion of people and therefore greater well-being, as long as contracts are respected, the principles of an open market are maintained and regulations are updated to help rather than complicate. You must not take the wrong path.