Bolivian Banks’ Profitability Plummets Amid Credit Quota Rules
La Paz, Bolivia - The profitability of Bolivian banks has taken a significant hit, with net financial margins decreasing despite maintaining comparable absolute profits to 2014 levels.
Net Financial Margins Decrease
According to data from the Association of Financial Institutions (ASFI), the net financial margin has shrunk, leaving many analysts concerned about the potential impact on medium-term banking expansion. The credit quota rules introduced in January 2015 have had a ripple effect on banks’ profitability. These regulations, aimed at directing credit towards productive sectors, have led to a decrease in lending to non-productive sectors such as household consumption and housing.
Impact on Banks’ Profitability
- Returns on assets (ROA) and returns on equity (ROE) are now lower than the regional average.
- The regulations have resulted in lower returns on assets due to decreased lending to non-productive sectors.
- The expansion of the definition of productive sectors has raised concerns about circumvention of the quotas and increased supervisory burden.
Banks’ Balance Sheets Remain Healthy
Despite the challenges, Bolivian banks’ balance sheets remain healthy:
- Low structural risks
- Ample capital buffers (system-wide capital adequacy ratio stands at 12.7 percent, above the minimum requirement of 10 percent)
- Non-performing loans (NPLs) also remain low, at around 2.4 percent of total loans.
Challenges in Meeting Annual Credit Target
However, banks are facing challenges in meeting the annual credit target for 2015:
- Many microfinance entities are struggling to meet the quotas due to their high exposure to commercial lending and dependence on interest margins.
- Big banks have managed to capture the best risks and extend additional credit to existing customers.
Lessons from Asian Countries
The experience of Asian countries, such as India, Japan, and Korea, suggests that credit targeting policies have often been unsuccessful:
- Directed credit programs have been associated with misuse of preferential funds, decline in financial discipline, and increasing budget deficits.
- Experts warn that the measures may lead to a reduction in funds available for medium-term banking expansion.
Consequences for Banks’ Profitability and Capitalization
The impact on banks’ profitability and capitalization is likely to be significant, potentially affecting the overall stability of the financial system:
- The measures may lead to a reduction in funds available for medium-term banking expansion.
- Experts warn that the consequences for banks’ profitability and capitalization are likely to be severe.