Loan portfolios have also strengthened to new levels this year, but the ratio of non-performing loans to total loans is still high at around 9%, according to new data from the regions banking associations. Peru, for one, has made real progress. Bad debts in the Peruvian banking system fell to a 23-year low in 2005 to October to 2.59%, down from 11% in 1998. Spains Lima-based Banco BBVA Continental has made the biggest impact in credit control, cutting its NPL ratio to 1.59%. It is now moving into higher-risk loans to small businesses.
Colombia has also done well, moving into high-yield consumer loans while maintaining solid loan recovery levels. Consumer loans rose to 22% of total loans in 2004 and the bad debt loan ratio has fallen to 5%, down from almost 10% in 2000. Chile leads the field with a bad debt loan ratio of just 1.07% this year to October, compared with 1.45% a year ago.
But Argentina, still recovering from its banking collapse in 2001, has a much higher ratio at 7%, and Paraguays NPLs are equivalent to 40% of the central banks reserves. Reserve coverage remains the systems Achilles heel in regards to asset quality as bank managements struggle to reach, or maintain, the minimum conservative mark of 100%, Moodys said in a recent report.
Still, Latin America needs banks to take credit risks to enable small businesses to grow and generate economic prosperity and remains an attractive market with high potential for development. The regions banking markets are underdeveloped and loans as a percentage of GDP are only 16% in Mexico and 30% in Brazil, compared with 129% in Spain.
Banks remain wary of lending to small businesses and corporate finance remains costly at about 20% for local currency loans and 10% for dollar loans.
A good sign is that foreign banks in Latin America are being capitalized by their parent companies and Citibank, Santander, HSBC and BBVA have injected large sums into their units in Argentina. Many banks are also being a lot more careful in their choice of lenders, even in riskier, low-income segments.