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A new decree passed by the Bolivian government which establishes minimum interest rates for deposits and caps on rates for loans to so-called "productive" industries will hit the profitability of local banks, said rating agency Moody's in a report.
The interest rate caps for these "productive" industries – which include agriculture, cattle, forestry, oil, gas mining, manufacturing, electricity, construction and tourism – will shrink interest margins, limit internal capital generation capacity and restrain organic growth, said the agency.
"In addition, the new regulations may prompt some banks to shift more of their portfolios toward riskier market segments to maintain profitability, leading to a decline in asset quality," said Moody's.
Under the regulations, corporate loans will be capped at 6%, SME loans at 7% and microfinance loans at 11%, rates which are currently below market levels.
Local currency deposits, meanwhile, will have minimum interest rates of 2% for savings accounts and 0.2-4.1% for term deposits, depending on the term.
This latest set of caps follows those imposed for housing loans (5.5-6.5%), as part of financial reforms introduced in 2013. Under the financial reforms, within five years productive sector and housing loans will have to make up to 60% of local banks' credit portfolios.
Banks which focus on the microfinance sector, such as Banco Solidario, Banco FIE and Banco Los Andes ProCredit, will be hardest hit by the regulations, as they traditionally charge higher interest rates, said Moody's.
The contraction in interest margins will reduce banks' earning power, leading to a decline in internal capital creation, while shareholders are unlikely to provide new capital as the regulations will make the industry unattractive for investors.
Bolivian banks are currently well capitalized as they have been reinvesting earnings to build up capital cushions, reflected in the banking system's tier 1 capital ratio of 10.7% as of March 31, according to the report.
"Bolivia's banking system has been growing at a cumulative annual rate of 21.5% over the past four years amid an economic boom," said the agency.
"However, rapid loan growth may lead to a decline in banks' asset quality as portfolios season, and as the pace of growth slows following this latest regulation."