Trends in Banking and Finance in Peru
Two years after COVID-19 was declared a pandemic, the impact it has had on economies around the world is notorious and has conditioned governments to take actions for the sake of their population. Peru is no exception. However, it has also forced the different economic players to reinvent themselves.
Both the crisis caused by COVID-19 and the political situation resulting from the election of a new president have caused the slowdown of the Peruvian economy. As a result, investors have continued their business strategies with an abundance of caution.
Some Relevant Numbers
The statistical reports of the Central Reserve Bank of Peru (BCRP) establish that the Peruvian financial market has maintained a positive evolution due to the recovery of economic activities at the national level, as well as the improvement in the international economic environment in recent months. This evolution was also influenced by some favourable measures adopted by the government to counteract the impact of the pandemic.
Nevertheless, the almost total paralysis of economic activities effected by the quarantines and lockdowns triggered by COVID-19 during 2020 impacted the prices of some commodities. Hence, due to factors such as the increase in international food and fuel prices, the 12-month inflation rate increased to 4.95% in August 2021. It should be noted that this phenomenon has not occurred exclusively in Peru – according to the statistics published by the central banks of each country – the largest economies in Latin America have registered in August of this year an annual inflation of 9.68% in Brazil, 5.59% in Mexico, 4.78% in Chile and 4.44% in Colombia.
However, the BCRP's monetary programme information note issued in September 2021 projects that inflation will return to the target range in the next 12 months, remaining there for the rest of 2022. Supporting this forecast is the fact that the transitory factors that generated this effect on the inflation rate will be reversed.
Another important issue linked to the effects of COVID-19 and the country's political situation is the devaluation of Peruvian currency against the US dollar and the consequent increase of the exchange rate.
Rise in the Interest Rate
Given the situation presented above, the BCRP has taken some relevant measures for the financial sector. One of them is the increase in the interest rate twice so far in 2021. The last of them (as of the date of this article), through a decision of the board of directors dated 9 September 2021. In August 2021, the BCRP increased its key rate by 25 bps to 0.50% and in September decided an increase of 50 bps to 1% (during 2020 the interest rate established by the BCRP was 0.25%).
This monetary policy measure results in an increase in financing costs. Though, our opinion is that this increase will not occur immediately in all types of financial operations. Accordingly, the last survey of the BCRP to the risk, commercial and financial areas of banking institutions, showed that the credit offer conditions will be more demanding for companies, especially for medium and large companies since they usually require medium or long-term financings and in larger amounts than individuals and “MYPES” (micro and small businesses). Therefore, it is expected that banking and financial entities will be more cautious when granting loans and financing, especially when they are requested by companies which scope of business have been directly affected by the pandemic.
In the coming months it is thought possible that some of the conditions that companies may encounter when requesting financing will be stricter than the ones in recent years. In other words, banking and financial entities could establish, within the financing conditions, higher interest rates, variations in financing terms, more demands on guarantees and liens, and lower amounts on credit lines. Based on the latter, banks foresee an increase of the demand for loans and financings by MYPES but not so by corporations and large companies. Fortunately, some measures to foster the access to financing by means of innovation in the financial system have been taken by the government.
As noted above, the Peruvian government has adopted a series of programmes and policies in favour of recovery and support for companies hit by the COVID-19 crisis. One of these financing programmes is "Reactiva Peru", which is a guarantee programme allowing companies that meet certain conditions to access working capital loans. This guarantee covers the outstanding balance of the credit granted with a coverage ranging from 80% to 98%, with terms of up to 36 months, including a grace period of up to 12 months.
Likewise, reactivation programmes aimed at specific economic sectors have been promoted, as is the case of the Business Agrarian Financing (FAE-Agro). The purpose of this programme is the creation of a fund in order to grant working capital credits for small agricultural producers that will allow financing and guaranteeing the setting-up of the 2020-21 agricultural season. These loans are channelled through companies in the financial system, as well as banks, municipal savings banks, rural financial entities, among other microfinance companies, including savings and credit cooperatives. These initiatives are expected to continue into 2022, until the growth levels of economic activities reach pre-COVID-19 rates.
However, and despite the efforts made by the Peruvian government in reactivating economic and business activities, there are still sectors that remain negatively affected by COVID-19. As such, in activities related to the development of the country, it is considered that there is a possibility of structuring financing with the intervention of multilateral organisations. Not only in its facets of co-operation and development for States, but also in its private “wings”, as well as co-operation and development banking. This would also be able to meet the demand not covered by commercial banking for corporations and large companies that could adjust to the development profiles.
Possible Intervention of the Peruvian National Bank
One of the proposals from the new government is that the Peruvian National Bank (Banco de la Nación) may be able to provide banking services in the same fashion as (and in competition with) banks. In fact, the current Peruvian Prime Minister recently announced that a bill on these terms is being prepared for consideration of the Parliament.
This is not the first time that the role of the Peruvian National Bank in the banking and financial market of the country has been under discussion. In fact, the last time was in June of the current year. On that occasion, it was the Parliament that formally intended to pass a law allowing the Peruvian National Bank to carry out banking activities that, to date, are not within the competence of said bank. The response of the Executive Power was to challenge (deny) said parliamentary initiative based on the subsidiarity of the role of the Peruvian State in economic matters as set forth in Article 60 of the Political Constitution of Peru.
Based on this precedent, the understanding is that any project promoted by the Executive Power (according to its political speeches), would have the same result of the one presented in June 2021 since Article 60 of the Political Constitution of Peru is currently valid and has not been amended or modify. Therefore, we do not see likely that the Peruvian National Bank may be able to compete with private banks in the short term or during 2022, as this would require a prior constitutional amendment, as well as some legal modifications, and finally an adaptation of the internal statutes of said Bank.
This does not mean that eventually the Peruvian National Bank may be able to have a more active role. However, it would be possible in the medium or long term and only if the discussion of a constitutional reform is put on the agenda.
Innovation in the Financial Market
On 23 January 2020, the government enacted the Urgency Decree No 013-2020 to promote the financing of micro, small and medium enterprises, entrepreneurship and start-ups. Said regulation granted faculties to the Superintendence of Stock Markets (SMV) and the Superintendence of Banking, Insurance and Private Pension Funds’ Managers (SBS) to allow the temporary performance of any operation or activity through innovative models (sandboxes). The pandemic delayed the elaboration of legal frameworks applicable to this topic. However, both regulators have already issued the regulation applicable in the securities and the banking markets.
On 20 May 2021, the SMV published the SMV Resolution No 045-2021 which regulates crowdfunding activities. It became effective the next day and provided a six-month adequation period for those entities which were already carrying out those activities. The scope of the resolution is the financial return alternative finance (equity-based and loans-based), not the non-financial alternatives (donation-based and reward-based). It regulates the requirements and rules that the originators (platforms) must accomplish such as minimum capital requirements, AML and market conduct regulations, as well as the deploy of escrow accounts, e-money accounts or a trust to segregate its own accounts from the accounts on which the crowdfunding activities are developed.
The projects that can be promoted are those with a business or personal use purpose. There are limits to the amounts that can be raised depending on the kind of purpose, and limits depending of the type of investor (qualified and non-qualified investors). Due to the novelty on this resolution, the grating of authorisations is still in process. It is expected that crowdfunding activities will blossom in the next years.
A new SBS Resolution
On 29 August 2021, the SBS published the SBS Resolution No 2429-2021, Regulation for the temporary performance of activities under novel models. This resolution will become effective on 22 February 2022 and will provide two regimes for fully-operating entities and those which are in the process of obtaining their operation licence. Thus, these regimens shall not apply to entities that do not have some kind of prior authorisation from the SBS.
The flexibility regimen is designed to temporarily relax regulatory requirements to carry-out activities already included in the legal framework. This scheme shall give green-light to innovative methods of proving existing services. On the contrary, the extraordinary regime is designed to allow the performance of activities not contemplated in the current regulation.
Both regimens may have a duration of up to 24 months. Their eligibility criteria demand that the innovative models:
This is a first and very important step towards the operation of a completely digital bank (challenger bank) in Peru. Although, the Peruvian Banking Law does not prohibit this kind of entities, the regulation in force is not adequate for banks proving their services on a digital only basis. Hence, it is expected that the experience gained during the sandbox period leads to the development of new regulation that incorporates the particular conditions under which these entities operate such as not having physical offices or safeguarding information on an electronic basis only.
Moreover, the new regulation includes the faculty of the SBS to establish additional criteria to the operation and mutual recognition of sandboxes implemented by national or foreign governmental entities, as well as multilaterals. This will permit the co-operation between the SBS and the SMV in those cases where the sandboxes under their supervision are intertwined. Likewise, the regulation will allow the participation of Peru in the multi-jurisdictional regulatory sandbox proposed by the Interamerican Development Bank in May 2021. This is a significant mechanism for alike markets that operate with the same participants. By means of this project the SBS may exchange information regarding the new players in the fintech ecosystem, increase its knowledge of the regional regulatory landscape and foresee upcoming challenges of new products.
Facing this opportunity, the challenge for the SMV and the SBS is to reach a balance between fostering innovation in the financial system and protecting the financial costumers. On the one hand, the aim is to achieve financial inclusion and better financing conditions for small and medium enterprises. On the other hand, the confidence in the financial system cannot be diminished by permitting reckless behaviour.
Financial Inclusion of Women
This article cannot go without mentioning the impact the COVID-19 crisis has had on the economic situation of many women and the obstacles they find in accessing the financial system.
Unfortunately, according to the most recent data, many women have been forced to leave businesses and even give up their paid jobs in order to dedicate themselves to tasks related to taking care of their homes and families. Thus, inequality and gender gaps have increased in recent months for both cultural and economic reasons.
Although reducing these gaps requires commitment throughout society, the financial inclusion of women for the economic reactivation of the country is necessary. Statistics show that prior to COVID-19 the disparity in access to credit between men and women was high, which is why access to financing mechanisms aimed at women has become urgent. This is not only because of the relevance of providing more tools that provide economic independence for many women, but also because it is time to recognise that a society cannot get out of a crisis if it is not inclusive and diverse.