The possibility for people and companies to easily access credit is vital to boost investment and consumption in an economy like the Colombian one.
In times of crisis, such as the current one, the Banco de la República has been lowering its reference rate from 4.25%, before the pandemic, to 1.75% for this month of October, precisely with the purpose of stimulating the national economy.
That decision has several consequences. On the one hand, it should be reflected in cheaper credits for individuals and companies, due to the effect this has on the interest rates at which banks lend in the country. On the other hand, an increase in local investment is expected.
Julio César Alonso, director of the Center for Research in Economics and Finance, Cienfi de la Icesi, explains that it is not easy for the issuer’s rate reduction measures to be immediately reflected in the banks and that this may take a few months.
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“One would like, in times of pandemic, a rapid effect of these measures, but it must be taken into account that uncertainty increases and that prevents the rates charged by financial institutions from falling at the expected rate.”
Is there cheap credit?
According to Banco de Occidente, there is cheap credit and, due to the economic impact of the health emergency, “interest rates on free investment and payroll loans have decreased by 9 basis points per month, averaging for 2020 in free investment 1 , 07% and 1.02% in payroll ”.
The same was commented by an advisor from Banco de Bogotá. “A few months ago, free investment credit, other than by payroll, had an average rate of 1.9% and now it is being lowered to 1.5% or 1.6% and drafts range between 0.99% and 1 2% ”, he commented.
According to the banking system, due to unemployment and the impact generated by the crisis, risk levels have increased, generating more rigor in the credit granting processes.
But the cost of credit does not depend only on what happens with the Banco de la República referral rate, but also on the risks, and at times like the current one, with a high unemployment rate and uncertainty, banks are careful to when placing the money: through greater demands or not by reducing the cost of that loan much.
Even so, according to the Superfinancial, with cut to September 25, the average interest rates of the different credit modalities corresponding to the isolation period register a reduction compared to the average interest rates at the beginning of 2020 for both households and companies . In particular, it reports decreases in the cost of financing with credit cards for individuals and corporations.
What could be expected then for the next few months and for 2021 is that the cost of taking out a loan will be a little cheaper, if there are no other conditions that affect the direction of the economy.
“According to the macroeconomic analysis and the impact suffered by the country, the bank is seeing a gradual recovery and in the same way it will be the expansion of credit as risk levels normalize,” said Banco de Occidente directives .
As of July 2020, households had debts of $ 155.5 billion, 4.7% more than a year ago and companies owed $ 278.4 billion, 8.11% more than for the same month of 2019.
Additionally, last July about 1.2 million credit applications were made for an amount of $ 58 billion. Of this total, 79% were approved, according to the Superfinanciera.
Who does it affect?
Julián Cárdenas, protection economist, stressed that the strategy of lowering the benchmark interest rates of the Banco de la República is a measure that is good for consumers and companies that have debt, because it alleviates a little in the cost of money.
But he considers that this determination also has some risks and that is that low rates do not motivate foreign investors, that is, the country becomes less attractive because generally those capitals are looking for high returns.
Likewise, they do not motivate savings so much due to low profitability. “Conservative and traditional investments, for example, those who keep their money in CDT (Certificate of Term Deposit) at the moment are not making much profit, because the rate is below 3% a year,” he said.
Even so, in Colombia there were deposits in CDT for $ 182.7 billion, as of July this year. 73.3% had companies and 26.7% natural persons.
On the subject, Felipe Campos, research director of Grupo Alianza, agreed that the Issuer’s low rates do not stimulate international investment, but says that it does boost local investment because people decide to do projects because they can borrow cheaply or consume more . Therefore, they help to generate a consumer environment that stimulates the economy and “if this occurs, indirectly international investment may come, but it is not a direct effect.”
He stressed that in times of low rates, worldwide, as we live today, investment (projects, companies, papers) can be stimulated because saving is not so profitable.
Low rates will continue
Economists at Bbva Research consider that the conditions of weak demand will continue in the coming months and, therefore, they believe that the Banco de la República will maintain low rates for a considerable period of time, at least until the middle of the year 2021.
“This as long as the economic scenario does not deteriorate significantly in the near future.”
Likewise, Juan David Ballén, Director of Investigations at Casa de Bolsa, says that the country is overcoming one of the largest recessions in recent history and that because of this he believes that the Banco de la República will maintain the interest rate throughout 2021 reference at its lowest level.
“Until the economy improves, there will be cheap credit. The increase in interest rates will depend on economic growth, the Issuer would increase interest rates when the economy no longer needs it and is growing close to its potential ”, he stated.
Throughout the period of isolation due to the pandemic (March 20 to September 25, 2020), companies and households have financed their economic and personal activities with loans. In that period, disbursements were made for $ 160.72 billion, according to data from the Financial Superintendence.
Likewise, until last July, the grace periods, extensions or redefinitions, which the banks made with the loans of companies and individuals, covered a total of $ 225 billion of the portfolio, corresponding to 11.7 million clients in the country.
For the month of July, the total balance of the credit portfolio in Colombia amounted to $ 526.2 billion.