Assessing the effects of recent provisioning rules on consumer credit allocation in Colombia
Summary
Focus
In January 2023, Colombia introduced new banking rules. These rules required banks to set aside more money to cover risks from long-term consumer loans. The goal was to reduce risks tied to lending with long repayment periods, especially during a time of strong credit growth. This paper looks at how these changes affected banks and their lending practices.
Contribution
The study uses detailed data on consumer loans in Colombia to measure the impact of the new rules. It focuses on loans with repayment terms of 72 and 108 months. The analysis looks at changes in loan amounts, interest rates and collateral requirements. It also examines how banks of different sizes adjusted to the rules. To ensure accuracy, the study uses advanced methods to compare loans before and after the changes.
Findings
The study found three main results. First, the new rules increased the reserves that banks set aside for loan losses. This improved their financial stability. Second, the overall effect on new loans was limited. Loan amounts, interest rates and collateral requirements remained mostly unchanged, indicating that the higher regulatory costs were not immediately transferred to borrowers. Third, there was significant heterogeneity across banks. Smaller banks reduced the size of long-term loans and required more collateral. Larger banks, on the other hand, absorbed the regulatory costs without altering their lending practices. These results show that targeted rules can improve financial stability without disrupting credit markets. However, the effects may vary depending on the size of the bank.
Abstract
Colombia's post-pandemic recovery in 2021–2022 was marked by rapid consumer credit growth, followed by deteriorating credit quality indicators amid tightening financial conditions. In January 2023, the Superintendence of Finance of Colombia (SFC) introduced higher provisioning requirements for long-term consumer loans to enhance financial resilience against credit risk materialization and to help moderate the rapid expansion of consumer credit observed prior to the reform. From the perspective of credit institutions (CIs), increased provisions imply higher expenses and potential profitability pressures, which could lead to adjustments in lending strategies. This study evaluates the effect of that regulatory policy on consumer credit dynamics and CI soundness. We find that the measure increased CIs' provision coverage ratio, indicating progress toward the policy´s resilience objective, but it did not significantly affect overall credit supply conditions for longer-maturity loans in terms of loan amounts, interest rates, and collateral requirements. However, these average effects mask notable heterogeneity across institutions. Smaller lenders tightened credit supply for loans whose maturity exceeds 108 months by reducing loan amounts and lowering loan-to-value ratios, while larger lenders absorbed the higher provisioning costs without altering credit terms.
JEL Codes: E51, E60, G21, G28
Keywords: loan-loss provisions, credit supply, consumer loans, credit risk
