From July 2017 to September 2018, the percentage of loans in dollars with payment arrears over 90 days or in legal collection increased from 1.57% to 2.95%.
The default on dollar loans is still under 3%, which is still considered normal. However, according to the trend reported in recent months in the records of the General Superintendence of Financial Entities (Sugef), the indicator is likely to exceed the 3% barrier.
The deterioration of the economy and rising unemployment are the main reasons behind the difficulties faced by companies and individuals in Costa Rica in paying back their bank loans.
According to figures from the General Superintendence of Financial Entities, between January 2017 and July 2018, the percentage of loans in defaults for more than 90 days or in judicial collection, went from 1.65% to 2.51%, showing an upward trend in recent months.
In the first months of the year, the pace of economic activity, employment and bank credit have been slowing down, complicating Costa Rica's economic outlook in the coming months.
During the fourth month of the year, economic activity reported an interannual growth of 2.8%, an increase that is below the average growth rate of 3% reported in the last eight years. On top of this awards of bank loans went up 6% with respect to February 2017, half the rate it was growing at a year ago.
Consumption by private companies and households went up by 4.6% in the first half of the year, exceeding the average growth rate of 2% of its main trading partners.
An example of the pace at which private consumption has been growing in the country is the relevance it has taken on in the bank's loan portfolios. Deputy general manager of Banco Nacional de Costa Rica, Bernardo Alfaro, explained that"... These kinds of operations rose from 28% of total credit seven years ago to 32% today."
In Costa Rica the index of activity in the construction sector has had 4 consecutive months of downturn, and now faces the threat of new financial rules which will make access to credit more costly.
The construction sector's main concern is the impact that interest rates will have on the new standards which financial institutions will need to comply with.They are predicting an increase in credit costs primarily because of the new rules already in force and which determine that for institutions that lend money"... The minimum percentage level of the countercyclical estimate required is 0.33%. Each entity must register on a monthly basis expenditure equivalent to a minimum of 7% of its profits, until it reaches an optimum level defined by the Sugef. "
The lending rates of Banco Nacional recorded an average reduction of 3.77% since January this year to date.
The reductions made by the Central Bank in monetary policy rate so far this year are beginning to have an effect on the structure of interest rates in banks. Banco Nacional, the largest in the market, recorded a drop of almost 4 percentage points in the interest rates for loans.
The escalation and volatility of the dollar in recent days raised the spread over 3%.
The volatility that has been seen in the exchange rate in Costa Rica in recent days has increased the spread between buying and selling dollars at the counters of financial institutions.
"'Given the much more abrupt sudden movements (in the exchange rate), there is an increased likelihood that we'll buy cheap dollars and after a few hours we'll sell them expensively. In order to cover this risk, the differential is increased," said Bernardo Alfaro, deputy general manager of Finance and Risk at Banco Nacional.
Rules for providing housing to the middle class are being approved without adequate studies on their feasibility and functionality within the financial system.
Within the current drive in the search for housing solutions for the middle class sector, three projects have entered the legislative process.
Of the three projects, two have already been made law and one is awaiting approval by Congress in the second debate.
Commercial banks are beginning to consider the possibility that interest rates will follow the downward trend begun in October 2012, and will be overtaken by inflation.
"The current levels of liquidity (amount of money) you see in the market is causing the costs for use of money to be reduced . (...) Furthermore, for now, there isn't an aggressive retreat in liquidity in the economy which suggests that the trend could be maintained," said Vidal Villalobos, an analyst in the Portfolio Advisory Group at Scotiabank.
Private banks operate with margins between interest rates which are considerably lower than state banks.
An article in Elfinancierocr.com points out that "the five banks with the lowest margins in the country are private ones, as is clear from a study by EF based on data reported to the Superintendent of Financial Institutions (Sugef) for December, 2012 ".
From October last year to date, public banks in Costa Rica cut their average rate by almost 4.5%.
"In the last four months state banks made a sharp rate cut to place them below the average of other intermediaries and brush with near-zero real returns", reported Nacion.com.
"The banks reduced their rates so that they are now the lowest among the sector and real returns are close to zero.
State banks are leading this growth, although private banks still retain 61% of the total loan portfolio in the U.S. currency.
An article in Nacion.com reports that "The growth in dollar loans from public banks is striking because it is a market that traditionally is dominated more by private financial institutions."
As an explanation for the growth in dollar loans, one point mentioned is the lack of perception exchange risk due to the behavior of the exchange rate, which for a long time has been very close to the lower limit of the exchange rate band set by the Central Bank, this coupled with the relatively low interest rates for loans in foreign currency.
There have now been seven consecutive months during which the default rate of borrowers from the Banco Nacional de Costa Rica has increased, having exceeded the normal limit of 3% over the past three months.
The increase in defaults is due mainly to problems with real estate projects in Puntarenas and Guanacaste, said Bernardo Alfaro, deputy general manager of the bank’s risk management office.
In January 2011, indebtedness in Colones was 59% of total loans, compared to less than 50% in 2009.
The low Dollar value and relatively low rates in Colones encourage borrowing in national currency.
Gerardo Corrales, manager of BAC San José, told Nacion.com, "... the decision to take a debt in Colones or Dollars, besides interest rates depends on customer expectations of devaluation or appreciation of a currency against the other."