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Cablegate: Loan Defaults Rise with Increase in Consumer Credit

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RR RUEHWEB

DE RUEHBO #0997 0732333
ZNR UUUUU ZZH
R 132333Z MAR 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 1925
INFO RUEHCV/AMEMBASSY CARACAS 0110
RUEHLP/AMEMBASSY LA PAZ MAR LIMA 6011
RUEHZP/AMEMBASSY PANAMA 1396
RUEHQT/AMEMBASSY QUITO 6667
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BOGOTA 000997

SIPDIS

SIPDIS

WHA/EPSC FOR PMAIER, EEB/OMA FOR ASIROTIC, TREASURY FOR
MEWENS

E.O. 12958: N/A
TAGS: EFIN ECON CO
SUBJECT: LOAN DEFAULTS RISE WITH INCREASE IN CONSUMER CREDIT

REF: BOGOTA 583

1. SUMMARY: After five years of strong economic growth,
consumer credit has reached record levels in Colombia.
However, the rise in consumer lending has also led to an
increase in loan defaults and suggestions that such defaults
could harm the solvency of Colombia's booming financial
sector (reftel). Despite the higher number of overextended
Colombian consumers, most financial observers downplay the
risk to the banking industry and emphasize that the number of
defaulted loans remains low as a percentage of total lending
and is centralized within specialized lending institutions.
END SUMMARY.

Just Charge It
--------------

2. Consumer lending increased 32 percent in 2007 after
growing 35 percent in 2006. During the same period loan
defaults increased 55 percent. While the total percentage of
consumer loans that result in default remained relatively low
at 3.25 percent, the steep percentage increase in consumer
credit and defaults has led some Central Bank officials to
worry that local financial institutions are lowering their
lending standards to aggressively pursue the lucrative
consumer loan market.

Financial Sector Largely Insulated
----------------------------------

3. Nevertheless, local financial experts tell us that the
private banking sector remains generally insulated from the
threat of portfolio erosion since most of the defaults center
in government-owned specialized lending institutions such as
the Public Education Credit Fund (ICETEX). Carlos Rojas,
Vice President of the Association of Financial Institutions
(ANIF), expressed doubt that that the overall financial
sector would experience any destabilization at the current
rate of defaults. He emphasized that the banking sector
possesses strong capital reserves and enjoys well-diversified
lending portfolios, including strong positions in the stable
commercial lending market.

Still, Maybe Time to Rein It In
-------------------------------

4. Colombian Banking Association (Asobancaria) President
Maria Mercedes Cuellar echoed the view that the banking
sector maintains a very diversified credit portfolio and
faces minimal threat from the increase in consumer lending
defaults. She characterized the increase in consumer credit
as a positive indicator of Colombia's economic development
and a legitimate extension of the financial sector to a
market segment that has long been underserved. However,
Cuellar suggested that Colombia's financial system would
benefit from closer examination of consumer credit patterns
and incorporation of that data into updated loan quality and
risk management models in order to avoid developing a
consumer credit bubble.
Brownfield

© Scoop Media

 
 
 
 
 
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