Friday, 13 February 2009

Spooky! Bankers Polled by IADB, Felaban See Crisis Lasting 1-3 Years in Latin America

A survey commissioned by the Inter-American Development Bank, the IIC (the bank's investment bank) and Felaban, the industry group for Latin commercial banks, found that regional bankers expect the crisis in financial markets to last between one and three years. They also see declining bank credit for small- and mid-sized enterprises (a reversal of the trend seen during the boom years) but greater interest in microfinance. The IADB, which released results of the poll yesterday in Washington DC, said two in three bankers surveyed believe the global credit crisis will affect their domestic markets in a significant or relevant manner. Well, hello! It's already happening!!! Interesting subject: Mexican bank executives were somewhat more optimistic than their Central American and South American counterparts.

The poll also found that six out of 10 executives foresee a decline in available funding for their financial institutions. This is scary for it means that banks will have a hard time raising funds that they can channel into new lending going forward. Another effect that is worth mentioning is the expected decline in worker remittances and in trade financing: both items have been fundamental for lenders in the region in the boom years.
Remittances are a key source of foreign exchange into the region's economies and for bank's dollar balance sheets. Many banks repackaged flows of remittances into securities that they sold to investors, raising money that they would funnel into new loans. On the other hand, trade financing is one of the first credit products that large global financial companies shut in times of turmoil. As you might remember (we wrote about this extensively a few weeks ago,) the Banco Central do Brasil had to pledge the use of $20 billion of the nation's reserves to lend to 4,000 or more companies suffering from clogged trade financing.

The survey, ''which on previous occasions was conducted to gauge banks’ views on SMEs, found that bankers anticipate that these businesses will face higher interest rates and stricter lending requirements.´´ Nine out of 10 bankers said their institutions remain interested in working with SMEs, providing them services such as working capital loans, credit lines, advice on export deals and payroll and payments management. Obviously, bankers remain interested in maintaining commercial relations with these clients. There's no free lunch, though: Borrowing costs for the segment rose by more than 5 percentage points in countries like Brazil and Colombia. But in the event that the global economy recovers rapidly (1 percent probability in my humble view,) banks need to have a range of credit-hungry SMEs to cater. Isn't it?

One important thing that bankers stressed in the survey wasn't surprising: the importance of positive cash flows and good credit track records among requirements for approving loans for SMEs. But, as you know, creditworthiness has deteriorated across all levels of borrowing, because exports are tumbling, domestic sales are limping and defaults by either final buyers or suppliers are rising. Countries like Mexico, Brazil and Colombia are experiencing rising unemployment rates (and as you might suspect, that is quite dangerous for banks.) Yet, ''an auspicious trend arising from the poll was the increased interest expressed by bankers in microfinance, which caters to businesses with fewer than 10 employees.´´ Large banks see this activity as an attractive alternative, more so than small financial institutions. Four in every 10 executives said their banks are already involved in microfinance, while three out of 10 said they plan to expand into microfinance in the medium term.

The technical information: more than 100 executives from large, mid-size and small banks from 19 Latin American and Caribbean countries took part in the survey conducted at the end of 2008, after the global financial crisis started to hit this region.

And to finalise this, a tad of publicity for the IADB: ''The global financial crisis will be one of the main topics of discussion of the IADB Board of Governors annual meeting, which will take place March 27–31 in Medellín, Colombia.´´

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