This week Fitch Ratings warned that the regulator-mandated liquidation of Estraval highlights potential risks ahead for the consumer asset-backed securities market in Colombia. The rating agency believes the biggest risk to watch is the lax regulation over the nation’s so-called non-bank financial institutions, which has at least in part led to the downfall of Estraval.
Specifically, Fitch cautions against the threats posed by the privately sold pools of payroll deductible loans (PDL) — credit that is repaid automatically out of a borrower’s paycheck — that Estraval was forced to unload in its sell off. While the default rate is generally low for such loans, the sector’s light regulation means that a potential rise in unemployment, among other factors, could have a big impact on the many enterprises now involved in the market.
The reorganization of Estraval came as a result of a ruling by the nation’s business regulator, the Superintendencia de Sociedades, which was forced to act due to the firm having, per Fitch, “double-pledged” portfolios of underperforming PDLs. The Bogotá-based watchdog learned about the double-pledged status of these loans only following a cash shortage for Estraval that was caused by a rise in defaults. Once it discovered it had no way to determine the value of the debts the firm owed to others, it ordered the liquidation.
The plight of Estaval was unusual for firms in the PDL market because the delinquency rate for this asset class is typically low. And that fact, along with their high interest rates, has led to growth in the market in recent years.
Hence the concern from Fitch, which says that the allure of PDLs is one factor spurring the rise of non-bank financial institutions in Colombia. It says that portfolios with — often poorly regulated — assets created through non-bank financial institutions are now estimated to make up 10% of the nation’s GDP.
There is some regulation, notes Fitch Ratings. Law 1527, passed in 2012, does provide oversight in theory, but Fitch says that PDL pools from non-bank financial institutions — called libranzas domestically — often fall through the cracks. So far, the nation’s low unemployment rate has kept the risk low. And Fitch does not expect that to change “for some time,” leaving its overall outlook on PDLs “broadly stable.”
Still, Estraval is one firm that has clearly made a mess. And a lack of regulation among an asset class that is rising in popularity creates the obvious potential for future problems — especially if more and more non-bank financial institutions continue popping up in Colombia.
Photo Credit: Superintendencia de Sociadades