Abstract |
wo main features of Perus credit market are the high disparities between lending interest rates for different borrowers and the size of interest rate spreads. This paper seeks to explain the behavior of lending interest rates in Peru through the evolution of their cost components (funding and operating costs and credit risk management) in 2010-2014.
We find that operating costs and the credit default risk are the most relevant factors underlying the level and variability of lending interest rates. An increase in credit risk raises interest rates through higher loan loss reserves and risk management costs. As a result, interest rates increase more for small enterprises, retail and consumption loans (demanded by the riskier market segments).
Another main finding is that competition plays a key role in the dynamics of lending interest rates, especially for SME and consumption loans (mostly denominated in domestic currency). In particular, the search for improved cost competitiveness has contributed to mitigating the compression of profit margins caused by declining lending interest rates and persistent credit default risks. In contrast, competition has been less intense in the corporate loan market, reflecting a higher concentration in this segment.
Interest rates for soles loans are considerably higher than for those denominated in dollars. The funding costs associated with higher reserve requirements on foreign-currency obligations are offset by a greater concentration of dollar loans in the less risky borrowers of each market segment.
Further reductions in lending interest rates will require increased competition in financial markets and substantial improvements in corporate governance, discipline and financial culture. |