Hawkish monetary policy not seen curbing rapid loan growth

Tuesday, August 9, 2011

The interest rate hikes decreed by Paraguayan central bank BCP have had little effect on tackling rapid loan growth, given price inelasticity in the fast expanding consumer lending segment, Daniel Correa, economics department manager at Asunción-based consultancy MCS, told BNamericas.

Net loans grew 23.7% in nominal terms to 29.1tn guaraníes (US$7.41bn) as of June 30 compared to the same time in 2010, mostly on the back of stronger consumer and SME lending, according to the latest figures released by BCP.

Last month, the IMF urged Paraguay's government to adopt measures to tackle strong loan growth, as the rapid expansion may lead to it repeat past boom and bust cycles.

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"The central bank has hiked interest rates in a bid to soften the effect of rapid loan expansion on inflation," Correa said. "But they have had little effect on loan demand, as individuals don't care as much for interest [rates] as they do for installments."

The reason for the loan growth is the country's strong economic expansion, which has led to an expanding middle class that demands more goods, as well as a significant increase in banking penetration among individuals and SMEs, he said.

Banks have been increasingly tapping these riskier segments as loan yields are higher, while new players with an exclusive focus on retail lending have recently entered the financial system.

The effect of this new trend on the system's asset quality is yet to be seen, Correa said.

According to BCP's report, the banking system's non-performing loan ratio improved to 1.58% as of June 30 from 1.65% a year prior, but worsened from 1.53% at the end of May.

Paraguay's 16 banks posted combined profits of 661bn guaraníes in January-June, up 33.1% on the same period in 2010, as strong revenues from fees and loans offset higher provision expenses.

The local banking system had 49.1tn guaraníes in assets and 5.23tn guaraníes in equity as of end-June.