According to the Debt Report 2018 presented by the Superintendence of Banks and Financial Institutions – the last one published -, in the country there were 4.6 million debtors to the banking sector; 850,000 people with debts in issuers of non-bank cards, and 86,000 debtors in credit unions; but there is a black figure that is not found in any report: that of people who turn to lenders outside the system and who do not respond to any type of regulation.
Alejandro Alarcon, former general manager of the Association of Banks, refers to this phenomenon, who believes that many credit users in Chile do not have access to formal entities, due to the existence of factors such as the conventional maximum rate. The interest rate is set freely between the parties involved, but it has this “ceiling” that normally applies in case of arrears or arrears; but this cap mainly affects the lower-income segments, as they are riskier in the probability of payment. Therefore, they are forced to resort to more expensive sources, such as unregulated lenders, relatives or friends, whose interest rates, according to various investigations, maybe triple those charged by the regulated banking system.
“The first effect of the conventional maximum rate is that there are many people who run out of credit because the costs are not enough to cover the risk. Those who invented the law think that putting a ceiling on will prevent abuse, but with that they take people out of the market and, therefore, there is no financing and lead them to try to obtain informal credit that is not regulated ”, The economist explains.
He stressed that the Anti-Abuse Agenda announced by the Executive on December 9 should point to these informal lenders and the revision of the regulations that set the conventional maximum rate.
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What is informal indebtedness?
There is non-bank credit in the specific case of retail stores. Some stores have a bank. There is a formal sector that is not necessarily banking. Compensation funds give credits, cooperatives. There are a large number of credit guarantors in our country that are not necessarily banks. The informal sector is something else, basically, sectors that give credits on the street, in the Plaza de Armas and that do not comply with banking regulations. That is the most important because the retail complies with some regulations, is subject to a conventional maximum rate, the compensation funds and cooperatives also have regulations. Basically, financial regulation seeks to protect savers, those who contribute their resources to finance those who ask for credit. The guarantors of credits are regularized and formalized, the informal is not. The informal is not controlled by anyone.
One of the reasons for overindebtedness has to do when paying loans, with new debt. Do people resort to this when the formal system is closed?
Informal loans have to do with the fact that many credit users in Chile do not have access to formal entities. In Chile, for years, there have been laws 18.010, sixth article, which establishes the conventional maximum rate. Simply those potential users do not have access to credit because there is a conventional maximum rate, which they cannot access and that has encouraged the informal market. The capital market softens the consumption of people and, not only that, but it also gives you access to buy goods that cannot be purchased at once, for example, a car or a house, etc. A conventional maximum interest rate sounds very seductive because it puts a ceiling, but with that, they are leaving many people out of the market, many financial institutions cannot lend to those rates, because it does not cover even the risk, not even the administrative costs.
When you put a restriction on the market, you put a maximum price, you make a black market appear, and the most important characteristic of the black market is that it charges much higher rates. It is an abuse. Outside of not being supervised or regulated. Financial institutions that are regulated and supervised do not send thugs to the street to hit people to recover the money as informal lenders do. There are famous groups in the Plaza de Armas, in the middle of the city of Santiago, that lend money and that when they are not paid they will look for debtors to their homes. What you have to ask yourself is why with legislation that is supposed to protect people, they end up harming them.
The informal sector is something else, basically sectors that give credits on the street, in the Plaza de Armas and that do not comply with banking regulations
How many people access this informal market?
The official reports do not report to the informal ones, but I think it is a lot of people. Millions of people in an informal credit situation, which means that there were millions of people who were abused because of the regulations because they did not have access to formal sector credit.
What is the relationship of this informal market with overindebtedness?
One of the issues that have appeared in recent years has been over-indebtedness, which appears because the economy has grown little. Including what is happening now, at the moment we speak, that for other reasons the growth of the economy is falling dramatically, even in the moments we speak we are under the threat of a recession, that leads people to lose their job. Having little growth, a recession and rising unemployment is a mirror. Increasing unemployment increases the main cause of risk for any credit guarantor. A person who is unemployed has a tax equivalent of 100% of his disposable income. If you become unemployed, your disposable income goes to zero, it is exactly the same as a 100% tax has been applied to your disposable income. Therefore, under these conditions, the risk of non-payment grows a lot.
Over-indebtedness occurs in situations where people spend more than they can produce and, therefore, have a creditor that lends it. In the case of banks, it is very difficult for there to be over-indebtedness because there are very strict rules, there are requirements of the regulation and of the state agencies so that a certain degree of maximum indebtedness is fulfilled, but you cannot be clear about how this indebtedness occurs when there is diversity of lenders. There are very firm protocols regarding the monitoring of people’s debts. If an entity, a person is not solvent credit guarantors are immediately withdrawn.
Another ways to get ‘easy money’ has to do with the sale in dollar quota of the credit card. Can this also be considered informal debt?
I would not dare to go so far, but it is a way to obtain liquidity in advance. You get the liquidity, you sell the quota, but the debt still exists. In the end, what he is doing is transforming terms, but in the end, the debt is still there. The debt does not disappear, what he has done is transform terms.
No one pays attention to the conventional maximum rate and the effect it produces especially on people with lower incomes
This month the Government announced an Anti-Harassment Agenda that pointed to over-indebtedness, what rating does the announcement make?
There should be a stronger punishment on informal lenders and criminal abuses that in many cases occur: physical intimidation is a criminal abuse. Nothing is achieved if we do not study what are the sources of this abuse. For example, nobody pays attention to the conventional maximum rate, the effect it produces especially on people with lower incomes. It is an abuse.
What are these effects?
The first effect of the conventional maximum rate is that there are many people who run out of credit because the costs are not enough to cover the risk. Those who invented the law think that putting a ceiling on will prevent abuse, but with that, they take people out of the market and, therefore, there is no financing and lead them to try to obtain informal credit that is not regulated. The effects derived from that are very harmful.
In the case of banks, it is very difficult for there to be over-indebtedness because there are very strict rules, there are requirements of the regulation and of the state agencies so that a certain degree of maximum indebtedness is fulfilled; but you cannot be clear about how this indebtedness occurs when there is a diversity of lenders.
What is your opinion of indebtedness in Chilean society?
I am not against indebtedness. Indebtedness is good because it allows people to pay in several periods, allows people who do not have the money to buy a car, an appliance, a house, resort to the capital market and pay this in installments. At reasonable rates. Chile in recent years has had the lowest historical rates in the country’s economic history. Debt is good as long as you can afford it.
Do citizens realize when this debt ceases to be healthy?
That is not supposed to happen with financial education, but people always see how to obtain resources. It is not about being an economist or finance expert to borrow. But everyone knows what their future income will be and that when there is no income in the future that situation becomes a nightmare. That is why a key component for the capital market to work is for people to have jobs. The countries that enter into recession and do not have people working are the countries that begin to generate risks. Beyond if they understand or do not understand, it is the understanding of a basic equation in the economic theory that is: if the expenses are greater than the income someone has to make a difference and those are the creditors.
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