Interest rate ceiling cut seen as opportunity for more responsible financial inclusion

- Wednesday, September 7, 2011

Interest rate ceiling cut seen as opportunity for more responsible financial inclusion

The Chilean government's proposal to cut the maximum legal interest rate that banks can charge on loans - known locally as the Tasa Máxima Convencional, or TMC - represents an opportunity to add more individuals to the system in a responsible way, economist Rafael Garay told BNamericas.

The TMC is an average of interest rates charged on loans plus 50%. The government has said it will propose cutting that rate to between 30% and 40%.

Chile's economy ministry is expected, within the next few days, to send a bill to congress that will focus on the TMC applied to short-term consumer loans for amounts less than 200 of the country's UF inflation-linked unit (currently a total of 4.4mn pesos, or US$9,450).

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Following a seminar on the issue, bankers expressed their concerns regarding the size of the TMC cut, saying it may exclude some 370,000 high-risk individuals from the credit market and reduce consumer spending, according to local press.

While it is true that cutting the TMC rate may leave some high-risk individuals out of the financial system, this is because the current system is flawed and creates high levels of defaults, Garay said.

"I see an opportunity here in reducing the level of default risk through better customer management, which under the current system is very weak. It's like buying a car without post-sale service," he said.

Economy minister Pablo Longueira also played down the bankers' worries, saying that the bill will lead to better risk assessment and that the planned creation of a consolidated debt registry for financial service customers could mitigate the impact of a reduction in the TMC.

According to Garay, the main losers in a cut of the TMC will be banks' consumer lending divisions, which have a higher percentage of lower-income individuals in their portfolios.

The final bill will be unveiled Friday, Longueira said.