Identifier
Created
Classification
Origin
04CARACAS3686
2004-11-29 21:03:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

MICRO-LENDING BOOM - QUANTITY VS. QUALITY

Tags:  ECON EFIN PGOV VE 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L CARACAS 003686 

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD
BUENOS AIRES FOR TREASURY - MHAARSAGER

E.O. 12958: DECL: 11/24/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: MICRO-LENDING BOOM - QUANTITY VS. QUALITY

REF: A. CARACAS 2172


B. CARACAS 3110

C. CARACAS 3536

D. CARACAS 3575

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A
ND D

-------
SUMMARY
-------

C O N F I D E N T I A L CARACAS 003686

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD
BUENOS AIRES FOR TREASURY - MHAARSAGER

E.O. 12958: DECL: 11/24/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: MICRO-LENDING BOOM - QUANTITY VS. QUALITY

REF: A. CARACAS 2172


B. CARACAS 3110

C. CARACAS 3536

D. CARACAS 3575

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A
ND D

--------------
SUMMARY
--------------


1. (C) Micro-lending has long been a neglected area in
Venezuela, though it is currently getting more attention than
ever. Banks have been required since November 2002 to commit
at least three percent of their credit portfolio to
micro-lending, but the GOV is now taking more direct role
through state development bank BANDES. GOV officials cited a
substantial increase in loans, stated the intention to focus
on import substitution, and demonstrated more concern for
getting money into the economy than the prospect of having
those loans repaid. (There are allegations that the GOV
micro-lending policies have more to do with building its
political base than with a serious effort at poverty
reduction.) The private sector had already ventured into
micro-lending, not only with the minimum requirement, but one
lender, BanGente, has been dedicated solely to micro-lending
since 1999. BanGente has been quite successful; it remains
to be seen if BANDES will be as successful, or even what
terms they use to define success. END SUMMARY.

--------------
THE GOVERNMENT METHOD - SPEND IT SOON
--------------


2. (SBU) The Bank for Economic and Social Development
(BANDES) was created in November 2000 from previously
existing state-owned institutions, primarily the Venezuelan
Investment Fund (FIV). The FIV had a focus on "strategc
industries," in particular the basic industrie (such as
mining, steel and aluminum production,hydroelectric
generation) provided by state-owne conglomerate CVG (see ref
A). While FIV was not particularly large,funding for BANDES
has incresed dramatically over the last three years, with a
current portfolio of over USD 300 million. The urrent
banking law, in effect since November 200, requires that
each bank commit at least 3% of is lending portfolio to

"micro-businesses." BANDS has been designated as the
primary institutionfor disbursement of funds from PDVSA's
Social Deelopment Fund (see ref B and previous),and is par
of the new Ministry of Development Finance - theMinister,
Nelson Merentes, was and remains the Pesident of BANDES.


3. (C) BANDES Vice President of Planning Luis Quiaro and
General Manager William Grillet explained to econoff on
November 3 that the basis of the bank's strategy was
articulated by the UN's Economic Commission for Latin America
in the 1960's, endeavoring to use internal resources for
overall development - as he admitted, import substitution.
In addition, Quiaro opined that, as many segments of the
population do not have access to banking services, it was the
State's responsibility to provide it for them. The vast
majority of loans are what the bank defines as micro - under
30 million bolivars (USD 15,625). However, President Chavez
has apparently also ordered BANDES to place a priority on
lending to "cooperatives," loosely defined groups of people,
perhaps neighbors, people engaged in a common economic
effort, even a church. In fact, Quiaro said that lending to
cooperatives could be based on a "solidarity security" -
credit based solely on this loose association - rather than a
traditional form of collateral. These loans would be larger
than micro loans, but would be disbursed further by the
cooperative itself.


4. (C) BANDES is rapidly increasing its lending portfolio.
The current portfolio is about 23,000 loans for a total of
600 billion bolivars (USD 313 million, 13,600 average),
having grown about one-fourth of that amount each year since

2001. (Quiaro showed statistics that indicated the
portfolios of some other smaller GOV lending entities which

have been established to provide micro-credit - such as the
Woman's Bank or the Sovereign People's Bank - were shrinking
as the GOV endeavored to "group" the micro-finance
institutions in the new Ministry.) Its 2003 budget was
approximately 650 million dollars. The bank makes its loans
at as little as 10-12% annual interest (NOTE: the current
average commercial bank rate is just under 19%),with up to
2-year grace periods plus the possibility of deferred
interest. When asked how to define the success of the bank's
lending plan, Quiaro showed statistics about job creation -
both direct and indirect - as a result of the bank's lending.
He also shied away from citing loan repayment as a criterion
for success, instead arguing that the important concept was
"accompaniment," i.e., the holistic approach of taking a
person from whatever stage of life - illiterate, uneducated,
needing finance - and ushering them through as many Missions
(ad-hoc government social welfare schemes) and programs as
necessary to achieve "independence."

--------------
PRIVATE BANKERS' VIEWS OF GOVERNMENT POLICIES
--------------


5. (C) Oscar Garcia Mendoza, President of private Banco
Venezolano de Credito, was quite scathing about GOV
micro-credit programs. He suggested that, given the apparent
lack of interest in repayment, they can hardly be considered
banking at all. Criteria for issuing loans, he asserted,
were quite political, and that the loans were, as is the case
with GOV "missions" in education and housing, they became
largely vehicles for regarding their supporters. This was
especially so in rural areas. Another banker told econcouns
the minimum 3% requirement for micro-lending by private
commercial banks are often ignored, or applied rather
elastically. He stated that it was easy enough for a bank to
break out part of a larger loan to an existing client, make
it a separate transaction, and qualify it as a micro-loan.

--------------
THE PRIVATE SECTOR PLAN - SPEND IT SMART
--------------


6. (SBU) Apart from the 3% of portfolio required of
commercial banks, there has been little effort in the private
sector to support microlending. There is only one bank in
Venezuela fully dedicated to it - BanGente (Bank of the
People),which currently has fifteen branches in five cities.
The bank was founded in 1997 (the Inter-American Development
Bank provided 10% of its financing) and issued its first loan
in early 1999. It has been quite successful, with 10,000
clients and profits at 70% of expenses. President Juan Uslar
says the primary reason for the bank's success is its
presence in the poorest neighborhoods ("barrios") and its
method of basing creditworthiness not on documents, but on
visits to the business and interviews of neighbors and others
who know the business owners. Uslar also said that, as
BanGente's entire portfolio was micro-loans, commercial banks
could provide funds and be able to count them towards the 3%
micro-lending minimum.


7. (SBU) Operations are simple - a loan officer will go to
the business and put the necessary information into a PDA,
which is downloaded into a computer for quick decisions. If
a loan is approved, the initial terms are usually three
months at 5% per month (80% annually). Uslar said that loan
sharks, who are the traditional source of finance for these
businesses, charge between 10 and 20% per month. Good
payment history may make the customer eligible for larger
loans at lower rates. The current arrears ratio is a mere
1.35%, and the average loan size is about 1.5 million
bolivars ($800). BanGente also offers savings and time
deposits, but sub-contracts all cash transactions to a large
commercial bank. Uslar says that, on BanGente's scale, this
saves money, but also reduces the risk of crime, allowing it
to operate in the areas it serves. He noted that the
limiting factor for the bank to grow faster was having to
train new loan officers, as micro-credit was not established
as in other countries in the region.


8. (C) When asked about competition with the GOV,

particularly BANDES, Uslar commented that there was so much
need for micro-finance, there was no competition. He then
added that some of BanGente's clients have left to seek loans
from BANDES, but then returned some months later citing an
inability to get funds.

--------------
COMMENT
--------------


9. (C) The lending philosophies of BANDES and BanGente are
clearly opposed: BANDES believes in quantity, while BanGente
goes for quality. The "holistic" approach indicates that
BANDES does not place high priority on loan repayment. We
share the strong suspicion of our private sector contacts
that the spending, disguised as loans, is just another way
for the GOV to get money into the economy as quickly as
possible (see ref D),seeking to force up growth and build
political support without concern for sustainability.
Brownfield


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2004CARACA03686 - CONFIDENTIAL