Cablegate: Citibank Skeptical of Government Lending Plans


DE RUEHSN #0246/01 0562231
R 252229Z FEB 10



E.O. 12958: N/A
SUBJECT: Citibank Skeptical of Government Lending Plans

1. (SBU) SUMMARY. Citibank El Salvador's head expressed skepticism
over Government of El Salvador proposals to increase lending
through secured transactions, government guarantees, and a
government development bank. In Citibank's view, cash-flow-based
lending is the most effective method, as secured transactions take
too long to collect on collateral and rely on El Salvador's erratic
court system. Similarly, government guarantees might help in a few
borderline cases but would not have a big effect, while a national
development bank lacks a coherent lending strategy. Reforms like
improving collateral-based lending would help further modernize El
Salvador's financial system, but issues like the court system will
also need to be addressed to broadly expand access to credit.
While Citibank is the most conservative major bank, its views are
shared by the other major players in the sector. END SUMMARY.

2. (SBU) According to Citibank El Salvador Executive Director
Alvaro Jaramillo, the GOES has proposed three main ideas to
increase lending and expand access to credit: increased use of
secured transactions, a government-backed guarantee fund, and the
creation of a government-run national development bank. The
latter two are new projects, while the former involves reforms and
expansion of existing laws. El Salvador does allow moveable
collateral-based lending, but a previous attempt at reform by the
Flores Administration (1999-2004), working with USAID, was not
fully implemented. The Funes Administration has revived these
efforts, also with USAID assistance.

3. (SBU) In Jaramillo's view, secured transaction reform would not
increase bank lending. Under the current system, he said, it takes
a minimum of 3.5-4 years to collect on the collateral in event of
default, and by that time the collateral equipment is in such bad
shape it is of little value. Citibank's only major
collateral-based lending is for coffee production, using the crop
as a guarantee, but Citibank puts extra checks on the process like
requiring the use of bonded warehouses for the final crop. Even if
the laws were reformed to make collection easier, Jaramillo said,
the banks still lack faith in the court system to fairly enforce
those laws. Jaramillo predicted that the international banks
would continue to use cash flow-based lending for the vast majority
of their portfolios.

4. (SBU) Government-guaranteed lending, according to Jaramillo,
might make a difference in marginal cases, with borderline cash
flow projections. Jaramillo said the GOES proposal would guarantee
30-40% of a loan, not its full value. The GOES would use the
state-owned second tier Multi-sector Investment Bank (BMI) to
provide the guarantees, which the banks consider sovereign
guarantees for their risk portfolios.

5. (SBU) The GOES's most ambitious proposal would convert BMI into
a first-tier national development bank, modeled after Brazil's
national development bank. In Jaramillo's opinion, however, the
GOES proposal lacks one fundamental component - a lending strategy
tied to clear development goals. Brazil, he said, used its
national development bank to build up key sectors like biofuels in
which it saw clear long-term potential. The GOES, on the other
hand, had not shared any kind of strategy with either the banks or
the Brazilian banking consultant with whom Jaramillo had spoken.
Jaramillo speculated that this idea may be driven more by the
desire to have a viable national bank that would be more responsive
to GOES program goals or incentives. Jaramillo added that in a
recent bank presidents' meeting, Minister of Finance Carlos Caceres
said Brazilian President "Lula" de Silva had been advising
President Funes that the internationalization of the Salvadoran
banking sector was a mistake, since the banks did not have El
Salvador's interests at heart.

6. (SBU) Overall, Jaramillo expressed pessimism over El Salvador's
economic prospects. He noted that Citibank El Salvador lost about
$18 million in 2009 (NOTE: Jaramillo subsequently told Commercial
Counselor Citibank El Salvador's losses totaled $70 million,
including write-offs of bad loans from the local banks they had
acquired. END NOTE) , but he added that the bank was still lending
where it saw prospects. Fundamentally, Jaramillo said, increased
consumer demand for businesses' products and services is needed to
really spur lending. Neither he nor Banco Agricola's

(BanColombia's) Colombian Chairman of the Board saw signs of
economic recovery, he said. In the longer term, the real question
for the country was where it would find its competitive advantage,
he added, and he did not have an answer.

7. (SBU) COMMENT: Financial inclusion and extending the benefits
of trade to non-traditional beneficiaries are policy priorities for
the Funes government, and the GOES has expressed interest in
working on these issues together with the United States. Reforms
like improving collateral-based lending would be an important step
in further modernizing El Salvador's financial system. Citibank's
frank assessment of the immediate effects on lending, however,
demonstrate that secured transaction reforms alone are not enough.
Other issues, like El Salvador's inconsistent judicial system, will
also have to be addressed in order to ultimately expand access to

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