May 2, 2019 was an unforgettable date for the Bank of Chile, controlled by the Luksic family. That day at its historic headquarters in Ahumada there was red carpet, first-class cocktails and the bottles of champagne were uncovered to celebrate that had finished paying the subordinate debt to the Central Bank (BC).
It is that in the early 1980s and in the context of the country’s deep economic crisis, the BC – with everyone’s silver – bought from Chilean banks its portfolio of overdue loans, thus giving them liquidity. By the year 86′, Central had passed 60% of those loans to banks in cash and the other percentage in letters. The ransom was written in the books.
37 years later, the ball is on the other side of the court. Now it is the natural and legal people who require support from banking, since thousands – due to the pandemic generated by Covid-19 – have lost or feared losing their jobs or have entered insolvency, or almost, and therefore have trouble paying their financial commitments, such as mortgage, consumer and working capital loans. Just over a month after the first case of contagion in Chile was confirmed, hundreds of thousands of customers have come to their doors.
Against this backdrop, with a series of facilities granted by the Central Bank, the Commission for the Financial Market (CMF), and by plans announced by the Executive, headed by President Sebastián Piñera, the rescue of the hundreds of thousands of SMEs affected by the health crisis, will ultimately be through banking.
The ransom is a millionaire. The Central Bank – and as its president, Mario Marcel, explained yesterday from the courtyard of Los Naranjos – has opened its wallet. Banks had already accessed fresh money for about $3 billion in recent weeks, but will now be able to raise it to $19 billion, at the lowest rate seen, even since the Subprime crisis: 0.5% over a four-year period.
Marcel further explained that banks will be allowed to add new alternatives to ensure their need for liquidity, including by backing up with portfolios of the bank’s best quality loans. The cash arrangement is total.
Thus, banks must take a leading role in preventing a larger collapse at the level of natural people and the bankruptcy of some 150 thousand SMEs that, as already assessed, may be with severe cash problems.
President Piñera detailed that the State will guarantee up to 85% of loans in smaller business cases (up to 25 thousand UF of annual sales) and that companies with sales up to 1 million UF will be able to access the profit, with a 60% pro rata. Banks will then, according to estimates, be in a historic position: they will have up to US$ 24 billion to deliver working capital to SMEs.
Easy, fast and preferential?
A column a few days ago by Neil Unmack in Reuters detailed the main differences of the economic crisis that can be derived from the Coronavirus and the 2008 Subprime, which triggered the bankruptcy of financial giant Lehman Brothers. “The differences are also very marked. Start with the banking system. In 2008, banks were in the eye of the hurricane of the crisis. They had low levels of capital, depended on fickle financing, and were highly exposed to high-risk loans. The bursting of the subprime mortgage bubble in the United States took the entire financial system ahead.” Unmack added that “today banks are safer. Their high-quality capital buffers have more than doubled, according to the Financial Stability Board.”
That’s why the issue is how they put that capital at the service of the economy.
Banks in Chile started a couple of weeks ago to offer all kinds of solutions, better and worse, to customers so that they do not enter into arrears. In the Senate Finance Committee, the president of the Association of Banks, José Manuel Mena, revealed this Monday, April 6, the first numbers: 625 thousand people and companies have requested rescheduling.
Unlike countries such as Colombia, which chose directly to pause financial commitments and freeze collections, Chile chose the path of reordering the debt, with public authority resting on banks to do so. And on this, mistrust has arisen.
President Piñera announced yesterday that banks will be able to lend to companies for up to three months of their sales, for a maximum period of 48 months, with an extra six months and at a “preferential rate”.
Doubts about possible “girl letters” in the conditions of banks to provide loans are an inevitable part of the debate. On the one hand, the CMF warned them – on 23 March after the Government announced its first package of measures – that “it is of paramount importance that banks maintain appropriate risk management policies and establish prudent dividend-sharing policies, depending on the exposure and risks they face at the new juncture. It is the responsibility of the corporate governments of each entity to ensure that this happens.”
It did not stay there, the entity stressed that “its main mandate is the stability of the financial system. It is an objective of the greatest importance, anchored in the recent economic history of our country, which in the 1980s suffered the impact of a banking crisis that hit the most vulnerable sections of the population with particular force and forced the state to come to its rescue.”
In previous weeks, the country’s various banks reported on their measures to alleviate the effects of the health crisis: quota deferment, preferred rates, or zero payments. Despite this, the dilemma of the rate and subscribing to new credits frightens people and businesses alike.
The Chilean Entrepreneurs’ Association (Asech) welcomed the Government’s announcement and stressed that it is on the right line to allow for issues as simple as paying salaries. However, he warned that leaving certain aspects to the free will of banks raises concerns. “What are our doubts today? How is this so-called “preferential rate” defined? (we need it to be truly preferential and understand that it is an aid to a historically critical moment and that, if not, it does not work); What will be the barriers to entry? That is, if they are going to give money only to those who are up to date, it doesn’t work either, considering that it’s been almost a month past the start of the health crisis,” said the guild’s president, Alejandra Mustakis.
The management added that it is just as important to figure out how quickly that aid will reach SMEs, “because the urgency is today, not in another month. Finally, we have doubts about what we do with those not banked and then, the non-bank institutions that can reach micro-entrepreneurs, how they can also be strengthened and that enter this ecosystem of support management (Banigualdad, Fondo Esperanza, Sercotec, Credit Cooperatives, Savings, Fintech). Because they know how to reach the little ones who are unformed and independent, who know that world better than anyone.”
In consumer associations, they said that historically the last word is the bank. “The position of other places where the crisis has been most severe is that the Government has set guidelines. State intervention is key, because the criteria of who does not pay, of whom of the most vulnerable percentage, of market conditions, are too subjective,” Odecu’s representative Stefan Larenas told El Mostrador Mercados.
In yesterday’s announcement, President Piñera assured that access to appropriations must be fast and standardized, but he also did not further detail the point, so doubts remain about the conditions that will be established for banking assistance: whether companies should be up to date with all kinds of obligations and why whether the package was geared towards SMEs , joined companies with annual sales of up to 1 million UF.
A criticism that was taken over yesterday by the Minister of Finance, Ignacio Briones, who explained that it is not possible to distinguish between sizes of companies, because today a medium or large could also “fall backwards” because of the economic effects generated by the pandemic, affect thousands of workers and thus the chain of payments.
Unapyme’s representative, Giannina Figueroa, said the problem was proposing as a way out of such a severe crisis to sign up for a new debt. “This is not positive, they say nothing of fees, only preferentials, and the requirements we already know are not met by SMEs, which since October 18 add more Dicom, more taxes, unpaid, more planned debts and that will not qualify. Therefore, the debt of SME companies will grow and this could discourage the keeping of employment, bone, more cessation”.
Doubts about the desirability of reschedulings and re-alignments alike affect SMEs and individuals, as while all banks went out to announce preferential rates, in any case they involve subscribing credit on credit.
This second package of economic measures announced by the Government has another axis, apart from SMEs. The Representative yesterday announced a $2 billion fund for self-employed people, who mostly do not have social security and are therefore unable to access the benefits of the Employment Protection Program. These resources should benefit 2.6 million informal workers, however this mechanism was neither detailed nor landed and as explained from the propGovernment, the respective bill that will be required is in the process of drafting and definitions.
