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October 25, 2014
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Central Bank pushes down loan rates

Reporters gather outside the monetary authority headquarters in downtown Buenos Aires.
By Francisco Aldaya
for the Herald

Interest on personal credit to range between 33-37 percent at largest entities

After months of threats from the government over perceived abuse and speculation from private banks, the Central Bank (BCRA) yesterday issued a ruling that forced banks to lower interest rates on personal loans.

The monetary authority unveilled a flexible ceiling for interest rates along with a requirement for financial entities to formally request permission before increasing fees and commissions. Under the regulations, the average personal loan from the largest banks would have an interest rate ranging from around 33 to 37 percent, down from as much as double that amount yesterday.

According to the new regulatory framework, interest rates for personal and inventory loans will have to remain below the rate for LEBAC notes — which stood at 26 percent yesterday — multiplied by a factor of between 1.25 and two percent, depending on the size of the bank or credit card company.

Smaller companies will be able to charge higher rates, and under the new rules outlined yesterday would be able to charge around 46 percent for personal loans.

With regard to fees and commissions, such as account and credit card maintenance charges, banks will have to file a request before the Central Bank and wait for authorization before implementing hikes. The government has reiterated over the last few months that private banks have applied extortionate and unjustified increases at the expense of consumers.

The US$9.7 billion profit for the private banking sector in January — 25 times higher than the same month last year — came as a direct consequence of the sudden near-15 percent devaluation of January paired with the command from the Central Bank to limit the amount of dollars banks can hold.

The inconsistency of surging profits for the sector and reports of excessively high interest rates for personal loans — sometimes almost double the average 48 percent — were thus addressed by the government.

President Cristina Fernández de Kirchner’s administration even alleged that banks had pushed for the devaluation of the peso in order to capitalize on the large amount of dollars hoarded by the sector while the dollar was frozen at between six and seven pesos.

This led Economy Minister Axel Kicillof to clash with Macro founder and CEO Jorge Brito over his call for spending cuts, with the former pointing to the “extraordinary profit” that banks saw as result of government policy.

Agustín D’Attellis, of the government-aligned think-tank La Gran Makro, told the Herald it was about time the BCRA started directing rates, “because the reform of its charter expanded its ability to do so.”

Playing down the potential of a surge in consumption, the economist said the measure essentially aims to reduce the profit margins of banks, “as their income has been massive since the devaluation.”

Similarly, IDESA consultancy director Jorge Colina considered the 10-point drop to the average rate provided by banks will “not be significant enough to make credit advantageous for consumption.”

Colina saw the move as contradictory following Central Bank Governor Juan Carlos Fábrega’s seemingly fruitless bid to hike rates, arguing the latter is what “is needed so the dollar doesn’t slip away from their hands” and spike upward.

Economy Minister Axel Kicillof thus seems to have outmuscled Central Bank Governor Juan Carlos Fábrega in the push to bring down rates and reignite consumption, which has plunged since they were raised back in February.

Fighting ‘usury’

Earlier in the day, Cabinet Chief Jorge Capitanich anticipated the government intended to regulate “interest rates so that banks cease to profit from consumers in a usurious manner.”

Raising interest rates served to cool down exceedingly hot inflation figures, but Kicillof insists that the rate at which prices rise loses relevance if the economy is growing.

Fábrega urged President Cristina Fernández de Kirchner to allow him to raise interest rates to approximately 27-percent in order to remove pesos from circulation and channel them into credit schemes, including fixed-rate deposits.

Since February, the average rate for such deposits over one million pesos has dropped down to 23.8 percent, a development that coincided with resurgent demand for the black market “blue” dollar; but the flip side is that the move will logically boost consumption, as people with pockets full of pesos will flock to buy TV sets as the World Cup kicks off tomorrow.

Kicillof yesterday hit out at banks over the “tremendous abuse we have seen in the last few months,” slamming the private finance sector as a “parasite for Argentine growth instead of a lever.”

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