IMF Publishes Report on the 2018 Article IV Consultation with Bolivia

The staff report highlights that the banking sector appears sound, although some indicators have been deteriorating. The overall capital adequacy ratio of the banking system stands at 12.2%, with all banks above the regulatory minimum of 10%. NPLs rose slightly to 1.9% of total loans in June 2018 from 1.7% a year earlier but remain low by international standards due in part to robust credit growth. The share of restructured loans rose to 2.4% in June 2018 and banks’ return on equity fell from 17% in 2016 to 12% in 2018, respectively.

The report notes that the Financial Services Law (FSL) has induced rapid credit growth and may be adversely affecting financial inclusion. The imposition of credit quotas and interest rate ceilings may have hindered the assessment of credit risks. The FSL may be inadvertently hurting financial inclusion, as available data suggest that the number of small loans decreased by 10% between September 2014 and June 2018 while loan amounts increased. International experience suggests that lending caps tend to reduce financial intermediation, lead to less transparency, and raise risks to financial stability, including by hurting the viability of small and medium-size banks. While the banking sector remains broadly stable, updated bank stress test results confirm the following trends that were noted in 2017:

• Credit risk: About one half (most) of banks would need to raise capital to meet regulatory requirements if NPL ratio doubles (quadruples) from the current level. Potential losses would be large for some banks but, in aggregate, the losses would remain manageable (at 0.1% and 0.9% of GDP, respectively).
• Liquidity risk: While liquidity at the system level has improved from a year ago, estimations under an extreme scenario––the largest deposit withdrawal rates observed in recent years happen at all banks simultaneously—suggest that many banks would struggle to cover liquidity needs.
• Exchange rate risk: Direct exchange rate risks are limited, reflecting low dollarization ratios and net foreign asset positions of banks.

The assessment suggests that key provisions of the FSL should be amended. Credit quotas should be relaxed to limit poor-quality credit growth. Interest caps should also be removed so that lending decisions better reflect intrinsic risks. Additionally, the recommendation is that efforts to make the supervisory and regulatory framework more risk-based and forward-looking should continue. The specific measures could include implementing full-fledged stress tests, introducing capital surcharges for operational and market risks, and adopting a review and evaluation process that considers the financial institution’s risk profile, risk mitigating techniques, and capital planning.

Related Link: Staff Report

Keywords: Americas, Bolivia, Banking, Article IV, NPLs, CAR, Financial Stability, Credit Risk, Stress Testing, Liquidity Risk, IMF