Negative Impacts of Interest Rate Caps on Peruvian Economy and Debtors

Such limits were imposed by Congress in critical circumstances, as the country was facing the toughest phase of the pandemic, with the economy in recession and a good part of the debtors suffocated by obligations that they could not meet, precisely in the face of the adverse environment.

Despite the difficult nature of this context, authorities such as Central Reserve Bank of Peru (BCRP) and the Superintendency of Banking, Insurance and AFP (SBS) expressed their apprehensions about the proposed measure, due to the distortions it would cause in the Finance system.

The impact of the measure, in fact, did not take long to manifest itself: thousands of people stopped being subject to credit from the financial system only in the period from May to December 2021, estimates the BCR.

“Since 2021, Congress forced us to set a maximum rate for consumer credits, which really excludes very low (amount) credits. Credit from financial entities that goes to the informal or rural sector, that is, loans of US$ 500 (S/ 1900) to US$ 1000 (S/ 3,800). “Those are being largely excluded”the president of the BCRP warned last week, Julio Velarde.

“It is a clumsy and silly measure (rate caps), but it is popular in several countries”he added when explaining the damage that the speed bumps have caused.

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Why does the BCR raise interest rate caps?

When the rule came into force, the BCR – which Congress entrusted with establishing the levels of the aforementioned limits – determined a ceiling of 83.4%, but since then it has gradually increased it to the current 96.3%.

With a higher limit, the issuing institute seeks to mitigate the harmful impact of the rule that, instead of helping debtors, as was the purpose of the legislators, has left many people and MSEs that need financing out of the formal financial circuit. your consumption or business.

Specialists explain how the limits leave many people without access to formal credit. The interest rate on the loans is made up of the operating and funding costs assumed by the financial institution, as well as the risk inherent to the loan. If these costs can be compensated by the bank with an interest rate of, for example, 120% assigned to the debtor (corresponding to his risk of default), it will grant him the credit. But if it cannot charge that rate because the legal limit (currently 96.3%) prevents it, it will deny financing to the applicant.

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Who do people who are left without credit due to the caps turn to?

Then, the excluded people will resort to the option they have most at hand: the informal lenders.

This is what the general manager of the company alerts Association of Banks (Asbanc)Miguel Vargas: “We see with great concern how informal financing has increased, specifically the drop by drop creditcriminal loans that are 500% more expensive than those provided by the financial system, a product of the regulation that set a cap on interest rates”.

This anti-technical rule has pushed a large number of people into credit, little by little, because formal financial entities can no longer charge them the interest rate at which they deserve to lend to them, he says.

Citing a study by IPEwhich estimates that today 600,000 people have credit drop by drop, Vargas maintained in RPP that almost half of these, or 300,000, left the financial system as a result of the questioned rule.

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Those most affected by rate caps

Mario Guerrero, head of economic studies at Scotiabankwarns that those who, without a credit history, try to access the financial system, are marginalized, but also those who, having been subject to credit from formal banks, are now excluded because, due to their risk, they are subject to an interest rate of more than 100 %.

The toxicity of the limits will be accentuated because they coincide with the economic slowdown, which leads banks to be more restrictive, just when people and MSEs more urgently require financing to cover their expenses, he says.

Consumer loans and with Credit cards low amounts would be out of reach of people with greater credit risk due to the limits, Guerrero details. He working capital For mypes in a similar condition it will also be restricted, he estimates.