IMF Urges Overhaul of Ecuador’s Public Banking Sector to Address Efficiency and Delinquency Issues

IMF Urges Overhaul of Ecuador’s Public Banking Sector to Address Efficiency and Delinquency Issues

The International Monetary Fund (IMF) said that Ecuador’s public banking – comprising of the National Financial Corporation (CFN), Biess, and BanEcuador – stands out as a significant player.

These financial entities constitute the third-largest public banking sector in the region in terms of assets. The assets of these public banking entities account for nearly half (46%) of the country’s financial sector assets, placing Ecuador behind only Costa Rica and Uruguay in this regard.

Challenges Faced by Ecuador’s Public Banks

Despite their substantial role in the financial sector, the IMF report highlights that Ecuador’s public banks are grappling with outdated information systems and inefficient credit risk management processes. This inefficiency is evident in the high delinquency rates experienced by these entities. For instance, as of June 2023, CFN had a delinquency rate of 28.5%, while BanEcuador’s delinquency rate stood at 24.2%. Both entities have the highest credit delinquency rates within the nation’s financial system.

IMF Recommendations for Ecuador’s Public Banks

In light of the challenges faced by Ecuador’s public banks, the IMF has put forth several recommendations. Firstly, it suggests eliminating the expectations of debt forgiveness within public banking. Secondly, it advises against merging problematic entities and instead recommends restructuring them.

This recommendation is particularly relevant in the current context, considering the ongoing merger plan between CFN and BanEcuador initiated by President Guillermo Lasso. The IMF urges that this merger plan be suspended until a feasibility assessment has been conducted. Further, the IMF emphasizes the need for enhancing the operational framework of Biess. It suggests that Biess should report customer delinquency to credit bureaus, a practice it currently does not follow. Additionally, Biess should also conduct a quality analysis of its mortgage and trust investments.

Public Credit Programs: A Component of Broader Interventions

Lastly, the IMF believes that public credit programs should not operate in isolation, but rather as part of broader interventions that include business advisory services. This perspective comes in light of President Lasso’s government promoting a credit program with a subsidized interest rate of 1% per annum for the agricultural and productive sectors.

The IMF said the public bank credit programs should focus not just on providing affordable credit, but also on reaching viable yet underserved new borrowers and incentivizing loan repayment. In conclusion, while Ecuador’s public banking sector holds a significant position in the financial landscape, it faces considerable challenges that need to be addressed to ensure its continued growth and stability. The recommendations made by the IMF, if implemented, could pave the way for a more resilient and efficient public banking sector in Ecuador.