Microfinance, Regulation and Uncollateralised Loans to Small Producers in Argentina
Microfinance is small loans and small deposits. The hope that microfinance can help small farmers and the self-employed has sparked much recent debate about how best to regulate microfinance organizations. However, changes to regulations do not make sense unless they create benefits from improved access to microfinance that exceed the costs created by those changes. In this paper the authors examine the role of collateral based regulation in Argentina and whether it is a constraint on increased lending to small rural producers.
During the Tequila crisis in 1995, the runs on banks led to a tightening of prudential regulation and supervision and the closure of smaller provincial and cooperative banks. Has this seriously damaged the access of small producers to loans? The authors do not think so – they argue that strong regulation is essential for attracting deposits and deposits are essential to provide funds for lending. As long as banks remain safe places to deposit savings, time will loosen constraints on access to loans.
Regulators in Argentina use the presence or absence of collateral as a low cost rule of thumb to judge the risk of portfolios. Uncollateralised loans have high requirements for capital and for loan loss provision. This ties up bank capital and so increases both costs for lenders and prices for borrowers. Other things being equal, this decreases access. However, access to microfinance for small producers in Argentina is constrained mostly by three factors unrelated to conservative regulation.
- First, the financial system is still shallow. As long as deposits are small, short and swift to be withdrawn, loans will be small, short and scarce. The greatest constraint on loans in Argentina is lack of deposits. Strict regulation will continue to strengthen and consolidate the banking system and thus deepen the market and attract more deposits.
- Second, most lenders who make uncollateralised loans can lend all they want and earn high profits from salaried consumers who are better clients than small producers. This is not a factor that justifies intervention.
- Third, weak registries for liens on movable goods and incomplete credit bureaux reduce the value of chattel as a hostage and reduce the incentives for borrowers to preserve clean credit records. Public resources used to improve these public goods would improve access to uncollateralised loans for small producers in Argentina.