LatinFinance - November/December 2014 - 18

properly evaluating the risks, says Melo at FMM. Some clients are
even borrowing from one institution to pay off debt at another in
Peru, according to van Stauffenberg.
High growth rates in lending have strained control systems, while
concealing growing risks, says María Belén Effio, general manager of
MicroRate for Latin America and the Caribbean. "If you lend more,
you dilute the portfolio at risk. You have a low indicator of nonperformance - but it is not low because of repayments."
Historically, the ratio of loans in arrears for more than 30 days
in Latin America has ranged between 0.5% and 2%, according to
Fernando Prado, general manager of Prospero, a microfinance
equity investment fund. "Anything above that means something is
not working," he says.
But in Colombia and Peru, microfinance loans in arrears of more
than 30 days are now around 6% of the portfolio. Moreover, and
despite signs that bad debt levels in some countries have begun to
subside, an economic downturn in these countries could cause the
level of arrears to double, says Altschul at Accion: a particular risk for
Colombia and Peru, after a further decline in commodities prices in
October.
By contrast in Bolivia, where microfinance accounts for half of
credit in the financial system, loans in arrears make up just 1.5% of
the portfolio. The low debt and high proportion of microfinance
in Bolivia "shows the possibility of microfinance to become a large
component of the financial system," says Claudio González Vega,
Ohio State University professor emeritus of rural finance.
Slowdown
Replicating the Bolivian example elsewhere in the region could now
be much harder, given over-indebtedness, and bad debt levels in
microfinance - or at least worries about this.
Overdue loans in some countries have continued to increase over
the past two years. In Colombia, for example, microfinance loans
overdue for more than 30 days increased by 50% over the past two
years, to 6.31% of the portfolio, according to the country's National
Guarantee Fund.
However, in the 58 institutions surveyed by the IDB and MIX, loans
more than 30 days in arrears actually dropped to 4% in 2013, having
risen from 3.6% to 5% between 2008 and 2011. Overdue bad debt
remains higher than average in Peru, at around 6%, although there
too it has declined over the past two years, from a high of around 8%
two years ago, according to MIX.

Good capital
Microfinance investment vehicles' assets, 2005-12
100

Other assets
Microfinance portfolio
Survey participants

90
1.9

Assets ($ bn)

7
6

1.8

1
0

60
50

0.8

0.5
0.5
0.7

2006

4.2

4.7

5.3

6.2

40
30

1.5

2005

3.1

3.8

80
70

1.1

1.7

20
10
2007

2008

2009

2010

Source: MicroRate MIV Survey 2013

18 L ATINFINA NCE.COM - November/December 2014

2011

2012

# of participants in survey

MARÍA BELÉN EFFIO, MICRORATE

"IF YOU LEND MORE, YOU DILUTE
THE PORTFOLIO AT RISK. YOU
HAVE A LOW INDICATOR OF
NON-PERFORMANCE, BUT IT IS NOT
BECAUSE OF REPAYMENTS"
Yet as the Accion-Citi survey shows, worries about overindebtedness in the industry are still high. Those concerns may be
less likely to subside, following the further declines in commodity
prices and the generally disappointing macro-economic data in
Latin America in recent months.
Moreover, worry about over-indebtedness appears to be
impacting the growth of microfinance. The increase in the number
of microfinance clients in the 58 institutions in the IDB-MIX survey
slowed to just 1% in 2013, while average loan growth among the 58
institutions was 7%. Partly due to a focus on bringing down bad debt,
loan growth at Compartamos, for example, slowed to just 5.37% in
the year to June 2014.
Does the slowdown signal an end to the boom? Was microfinance,
perhaps, always just a fad - and a particularly risky one?
Perhaps not. Indeed, the interest in microfinance among
institutions like Banorte and Credicorp suggests the ascent of
microfinance may be only just beginning. In some ways, the
concern about over-indebtedness is leading to a situation where
microfinance is ever more integral to the mainstream banking
system in Latin America.
It is not just that microfinance institutions are gaining the
regulatory approvals needed to convert into banks, although that is
happening (Banco WWB, one of Colombia's biggest microfinance
institutions, became a bank in 2011, for example). A newer trend
is that some of the thousand-plus independent microfinance
institutions across the region are consolidating, and partly because
of continued worries about over-indebtedness.
Credicorp's acquisition of Mibanco - and its merger into Edyficar
- is an example.
Last year, after an ambitious regional expansion in microfinance,
Mibanco's majority shareholder Grupo ACP breached debt
covenants on its $85 million 2021 corporate bond. Regional foreign
exchange volatility led to losses at ACP, according to Fitch. Return
on assets at Mibanco, ACP's biggest revenue generator, dropped to
0.74% in the first half of 2014, mainly due to credit losses.
The Accion-Citi report describes the merger with Edyficar as "a
symptom of the sector's malaise": Mibanco was sold for just 1.3 times
book value, compared to a book value of 2.5 times that Credicorp
paid for Edyficar in 2009.
Now difficulties at the smaller regional savings and loan
associations in Peru may spur further consolidation, says Prospero's
Prado. "Mergers are the name of the game in Peru," he says.
Eduardo Torres Llosa, chief executive at BBVA Continental in
Peru likewise mentions loan-loss ratios at rural loan and savings
associations and their urban equivalents as a factor likely to lead
to M&A. "They need to gain scale," he says. "Microfinance is going
through a consolidation process normal to any sector."
News broke of another acquisition in Peru in April. Diviso
Financial Group, owner of Cusco-based Credinka, bought a 67%
stake in Arequipa microfinance lender Financiera Nueva Visión, for

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