A Peruvian government loan guarantee fund has reignited private credit growth in the country, though banks' bottom lines are set to see little-to-no benefit from the measure.

Reactiva Perú, as the guarantee scheme is known, saw nearly three-quarters of its initial 30 billion-sol budget taken up in the first month after its launch in May. The government subsequently raised the size of the program to 60 billion soles, equal to about 11% of Peru's GDP.

The fund, created in an effort to combat the effects of the coronavirus pandemic, provides banks with a 98% guarantee on loans of up to 30,000 soles, and an 80% guarantee on larger loans ranging from 7.5 million to 10 million soles.

According to a document provided by Peru's Ministry of Economy and Finance, the Reactiva program has "prevented a collapse in credit" similar to those seen during the global financial crises of 1997-1999 and 2008-2009.

The total balance of loans to companies in May jumped 11.4% from the prior month and rose 21.4% compared to a year prior, data from the SBS financial regulator shows. By contrast, the monthly increase between March and April had been just 1.5%.

"This instrument has prevented a halt in credit, which we would have expected considering the 40.5% drop in GDP in April and the elevated risk associated with companies," José Carlos Saavedra, chief economist at Lima-based think tank APOYO Consultoría, said in an interview, emphasizing that loans to micro- and small-companies had already been dwindling in March and April.

The main objective of the program has been to shield companies from bankruptcy, he said, adding that the volume of credit granted to each company is determined by its sales revenue. APOYO Consultoría currently forecasts a 14% drop in GDP for Peru this year, followed by a 9% recovery in 2021.

Reduced margins, reduced profits

But although credit has been on the rise in Peru, the reduction of margins has taken its toll on banks' profits.

More than 90% of the businesses that took out loans during the first month of the scheme had 100 or fewer employees on their payrolls. These micro- and small-companies used to borrow money at an average interest rate of 25%; under the guarantee scheme, they can now access credit at an average rate of just 1.92%.

Similarly, medium- and large-companies were able to secure credit lines at an average rate of 1.6%, compared to 7% before the pandemic.

But the rise in credit has not been enough to offset steep declines in bank's profits in May.

Banco BBVA Perú SA, Peru's third largest bank by assets, saw an 84% drop in net income in May, according to SBS data. Similarly, Banco de Crédito del Perú S.A., the country's largest bank, saw the combined profits for Banco de Crédito del Perú SA and Mibanco Banco de la Microempresa SA decrease by 89% in the same period.

Asked about the impact the program might have on the bank's interest income and overall profits, Juan Carlos Ramírez, head of Enterprise at BBVA Perú, maintained that "BBVA's interest in participating in this program was not focused on earning income, but on working hand in hand with the country to help deal with the current emergency situation."

"BBVA has assumed all the operating costs and made available to companies all of its human, technological and physical infrastructure," he added.

While demand within the Reactiva program has been high, this has not been the case for most other credit products and has led to both lower margins and profits, according to S&P Global Ratings analyst Cynthia Cohen Freue. Without the program, she said, there likely wouldn't have been much lending at all.

"With fewer business opportunities and high risk, it's more convenient for [banks] to give out these loans," Cohen Freue said, noting that lenders "don't have to make additional provisions for the percentage of the loans that is guaranteed by the government, and there are no capital requirements."

Income fees are also waning, provisions will keep rising, and in this context banks are expecting their profits to be halved on 2019 levels, S&P Global Ratings analyst Sergio Garibian said.

While Reactiva Perú primarily has reached companies with some form of credit history, "this isn't a very attractive business opportunity for banks, as the central bank has made them compete to lower interest rates, leaving them with no margin at all in some cases, or even losses," APOYO Consultoría's Saavedra said.

"But by preventing companies from shutting down and upholding the supply chain, they are indirectly looking out for future business," he added.

The president of the Peruvian Association of Finance, Alejandro Gómez, is confident that the Peruvian government has the capacity to cover banks should companies default.

"From conversations I have had with Central Bank Chief Julio Velarde and several former economy ministers, Peru is so solvent that it can support a fiscal stimulus package worth 25% of GDP billion without losing its investment grade," he said.

"The government is expecting that least 75% of Reactiva Perú loans will be repaid," he added.

As of July 8, US$1 was equivalent to 3.54 Peruvian soles.