Venezuela is looking to cut capital adequacy ratios for financial institutions to levels at a time when banks are ramping up consumer lending, increasing risk substantially. Bankers in Caracas say that the move, if implemented, would take the country further away from Basel II standards and further undermines the credibility of the banking system.
Capital adequacy ratios have already been cut once, in 2005, when they were reduced from 10% to 8%, points out Francisco Faraco who runs a banking consultancy in Caracas. The new proposal is to reduce them a further 2%, he notes. José Grasso, bank analyst at Caracas-based Softline Consultores, says that while the law is not yet certain to be passed, the previous decision to grant a reduction in the rate suggests that banks are likely to be successful in their bid to have it reduced again.
Banks have been calling for the measure largely to satisfy the growing thirst for credit in the country. Consumer lending has been increasing fast as Venezuelans rush to get their hands on assets because of a flood of money into the country thanks to record high oil prices. That is driving up inflation which is currently at 19% and consumers are desperate to get their hands on assets that wont depreciate, particularly real estate and cars, fearing that the government might look to devalue the currency against the dollar to combat inflation, says Grasso. At the same time, the government has been tightening legislation that compels banks to direct more of their lending portfolios to favoured areas, including agriculture, tourism, and microfinance.
Banks are now required to make 40% of their lending to these sectors. Interest rates on government lending are capped at rates that leave little room for profitability and that has driven banks to the consumer market, where interest rates are capped at the much higher rate of 28% per annum.
The reduction in capital adequacy needs to be considered in the context of a banking system in which the credit bureau does not divulge any information on the creditworthiness of individuals. That means that when banks take on new clients for lending, they have no details on repayment history, analysts point out. Not only that but legislation in the country allows banks almost no recourse to the underlying assets in the case of default. For now, delinquency rates remain low, but an increase in interest rates with higher repayments for borrowers could see non-payment levels rise fast, they say.
The bigger picture is more worrying still. There are growing that the entire Venezuelan banking system may be nationalized because President Hugo Chávez is moving the country towards socialism and a private banking sector is typically seen as incompatible with a socialist system. Analysts point out that Fidel Castro nationalized the Cuban banking system when he took power and that Chávez sees him as a model leader. The Venezuelan president is working on a new constitution that may provide more details on the status of banks within the system. For now, more than 90% of the Venezuelan banking system lies within the private sector.