The Bolivian banking sector is braced for a more regulated and less profitable operating environment when the government publishes the details of its financial services law. The law, which was promulgated on August 21 2013, contains 540 articles that – in the main – are designed to constrain banking profits. The details, which include deposit lending floors and lending rate ceilings, were supposed to be published within 90 days of the law being passed, but the crucial details have yet to be announced. They are expected shortly.
The new financial services law will usher in an era of lower margins for the banks, but there is hope and expectation in La Paz that the leftist government won’t seek to hit the banks too hard. The country’s recent strong GDP growth – predicted to be 6.7% for 2013 – has been largely driven by private-sector credit growth and the government is reportedly aware of the dangers of saddling the banking sector with too high a cost from the new regulations.
“There will be a significant impact on bank profitability, but we do expect pragmatism [from the government],” says Cesar Arias, Latin American sovereign analyst at Fitch Ratings. “This financial services law is intended to reduce the profitability of the sector but not to ruin it, because the government understands that its recent GDP growth has been growing at that rate largely due to the growth in private consumption, which has been growing at between 15% and 20%.”
The Bolivian government, led by leftist president Evo Morales, has already shown itself to be predisposed to reduce profits in the banking sector, which – apart from Banco de Crédito del Perú – is all domestic entities. In 2012 a new 12.5% income tax was introduced on financial entities whose returns on equities exceed 13% and a new 0.7% tax was levied on all foreign exchange transactions, which was one of the most profitable segments for Bolivian banks.
The Bolivian government is also trying to moderate banking profits through a market-led strategy. It has capitalized two state banks – Banco Unión and Banco de Desarrollo Productivo – and tasked them to expand quickly their loan portfolios at lower rates than seen in the private sector in an attempt to inject competitive pressures. Arias expects that Banco Unión, which had a $500 million capitalization in 2013, might become Bolivia’s largest bank in the coming years, but so far this strategy has had limited impact, according to Kurt Koenigsfest, chairman of Asoban, Bolivia’s banking association, and CEO of BancoSol. “Banco Unión is currently the fifth or sixth largest and it doesn’t have a significant weight yet and so although it is having an aggressive participation in the market, the largest banks haven’t really reacted, but let’s see what happens,” says Koenigsfest, who adds that the new financial services law will include mandatory lending to certain areas of the economy. This will require banks to extend loan portfolios into new, riskier areas such as the rural economy.
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