Colombia growth gets tough on banks

After two sluggish quarters of growth, Colombia’s finance minister, Mauricio Cárdenas, is determined to reignite the economy even if that means cornering banks to lower interest rates.

That’s understandable. 

After all, while the country’s central bank has been busy slashing interest rates since last July, the banks have not really been passing on the cuts.

“We understand there is always a lag,” Cárdenas told beyondbrics earlier this week. 

“But we are surprised some rates have not moved at all.”

While the central bank has lowered rates by some 38 per cent from 5.25 per cent to 3.25 per cent since last july, commercial loan rates are down only 9 per cent. 

Consumer loans are 7.3 per cent lower while mortgage and micro-credit rates have gone down by less than 5 per cent.

There are a couple of theories on why Colombian banks have been reluctant to drop rates.

Some analysts think banks feel they need to charge high rates to compensate themselves for the risk they take when they issue credit card and car loans to new borrowers particularly younger ones.

Others blame the concentration of Colombia’s banking sector in the hands of a few banks. 

Domestic banks dominate the financial sector, with Bancolombia, under the umbrella of Grupo Sura, and its competitors Grupo Aval and Grupo Bolívar, being the country’s major players.

The Oecd was among those who expressed concerns over the dominance of these few groups in its latest country report in february.

Some indicators show that there is weak competition in the banking sector partly due to a high degree of concentration, which has increased over the past decade in almost all deposits and loan segments. 

Other indicators suggest that competition is particularly weak in the commercial and consumption loan segments and confirm a strong relationship between concentration and bank’s ability to control prices. 

Low competition is evidenced in the high cost for consumers of switching banks and the banks’ impressive profitability.

Cárdenas thinks introducing more competition by lowering the capital requirements for new entrance is key. 

“Competition is the name of the game,” he said.

Still, there are signs that all the political pressuring is starting to yield results. 

Bancolombia, Colombia’s biggest bank by assets, has recently cut its credit card rates by over 2 percentage points and cuts in housing and vehicle loans reportedly in the pipeline.

And this according to analysts at Bancolombia, could well “trigger the inter bank rate war the Finmin so badly desires in order to stimulate the economy.”