- Microlending widens financial inclusion, but structural obstacles--such as the population's lack of access to internet and financial education, along with difficulties for lenders to reach potential clients in rural areas--still hinder the expansion of such lending in Peru.
- Microlenders face higher credit risks than traditional banks due to the borrowers' limited financial means and higher vulnerability to external shocks, among other factors.
- S&P Global Ratings believes that the industry needs greater oversight, capital support, and ongoing improvements in risk management and regulation.
Microcredit has been a fundamental instrument for the development of individuals and small enterprises in Latin America, allowing many of them to have access to the financial system, which promotes entrepreneurship and competitiveness. Microloans are a gateway for informal businesses that, because of their small scale and lack of credit history, are unable to access funding from conventional banks. Peru's microfinance segment has developed rapidly during the past several years thanks to financial capacity of microlenders sufficient enough to support their growth, a favorable regulatory framework including fair capital requirements, low barriers to entry, and oversight by the Superintendencia de Banca y Seguros (SBS), the financial regulator. Microloan volumes in Peru have risen on average 12% per year since 2010, primarily boosted by growth of the Cajas Municipales de Ahorro y Credito (CMACs; microfinance lenders ) and MiBanco Banco de La Microempresa S.A. (BBB/Negative/A-2), which have grown nearly 20% on annual basis since that year.
There's a wide range of microfinancing institutions in Peru, all of which are regulated. The SBS oversees about 36 entities providing microcredit, SME loans, and other consumer loans to the low-income segment of the population. The CMACs grant about a half of microloans, followed by MiBanco (around one-fifth) and other financial companies (the remainder).
Microfinance Providers Face High Credit Risks
Asset quality of the microlenders' loan portfolios is weaker than those of commercial banks (30-day non-performing loan ratio average of 7.1% versus 4.1%) because of their business model. There are several reasons for such a gap. First, these lenders provide credit to people and small companies that are more vulnerable to distressed economic conditions and lack credit history necessary to run appropriate credit risk models to ensure accurate pricing. Second, contrary to recipients of loans from traditional banks, microloan borrowers don't have suitable guarantees to mitigate credit losses in the event of default. Third, competition and the microfinance supply glut led to excessive indebtedness among borrowers, undermining asset quality. Fourth, the rapid lending growth also can weaken credit quality if lenders don't have sufficient capacity to support new underwriting.
External factors are also hampering asset quality of microlenders, such as macroeconomic instability, weather risks, and social unrest. For example, Peru's economic deceleration in 2009, 2014, 2017, and 2020--triggered by several exogenous factors including the global financial crisis, "El Niño" phenomenon that caused flooding and business interruption, corruption scandals, and the pandemic that eroded borrowers' cash flows--took a toll on asset quality during the subsequent years. However, the government relief measures mitigated the adverse effects of the pandemic on asset quality.
Robust Growth Prospects
A substantial portion of the region's population is still locked outside the formal financial mainstream. Only about 15% of Peru's working-age population borrows from financial institutions. In addition, like in other countries in Latin America, Peru has a high level of informal economy, which was hit hard by pandemic-induced lockdowns. According to the International Labor Organization's report, the share of informal employment is at 70% in Peru compared with the 64% average of the Latin American countries. Nevertheless, we believe such a situation offers Peru's microfinance sector opportunities to grow and further develop. But it would require the government to expand the internet and mobile networks, along with financial and digital education to the population. The development of technology is important because it allows access to low-cost transactions and access to financial services, particularly for people located in hard-to-reach areas of the country.
A Ways To Go To Become Self Sufficient
Despite the sector's favorable growth opportunities, it needs to support its long-term operating sustainability through sufficient earnings and capitalization. Although microloan providers benefit from higher lending interest rates than those of universal banks, underwriting costs are also higher mainly due to more complex credit risks, given the focus on borrowers with limited credit history located in out-of-the-way areas and who are also vulnerable to economic woes. In addition, stiff competition among microlenders through interest rates further dent their margins. Some players are implementing measures to mitigate pressure on profitability by offering additional financial services or expanding operations to other countries, as is the case for MiBanco. However, we expect lending to low-income clients that are more vulnerable to distressed economic conditions than other types of borrowers, will continue generating earnings volatility for microlenders. However, these entities gain customer loyalty by providing credit to many previously unbanked people which help them improve living conditions and promoting business. This also supports business stability and growth.
|Microlenders' Key Metrics|
|Cajas Municipales||MiBanco||Empresas Financieras||Universal banks|
|Lending interest rates*||36.1%||37.4%||53.8%||18.1%|
|Operating costs/financial margin||61.6%||54.4%||55.2%||44.2%|
|Return on equity||11.7%||14.8%||13.7%||18.8%|
|*For universal banks, data refers to the average interest rate of corporate lending, SME loans, microlending, consumer lending, and mortgages.|
A Proper Business Platform Would Bolster Performance
We believe that sustainable and profitable growth of the microlending sector requires authorities and lenders to develop confident sources of credit information and strengthen underwriting standards, credit risk management, and collection models while capitalizing on the increasingly advanced technologies. The market leader, MiBanco, already adopted some initiatives in that regard including better estimate and segmentation of credit risks and adopting a more efficient collection process. The bank's larger competitors, CMACs, benefit from a non-profit status given that local governments own them, which allows these entities to reinvest earnings to maintain business infrastructure to expand underwriting, while maintaining satisfactory capitalization. Moreover, MiBanco derives benefits from its status as a subsidiary of Banco de Crédito del Perú S.A. (BBB/Negative/A-2), the largest bank in Peru, which helps support MiBanco's lending growth and absorb unexpected hits to credit quality.
This report does not constitute a rating action.
|Primary Credit Analyst:||Camilo Andres Perez, Mexico City + 52 55 5081 4446;|
|Secondary Contact:||Sergio A Garibian, Sao Paulo + 55 11 3039 9749;|
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.