US embassy cable - 04CARACAS3686

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 
 
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SUMMARY 
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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. 
 
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THE GOVERNMENT METHOD - SPEND IT SOON 
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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." 
 
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PRIVATE BANKERS' VIEWS OF GOVERNMENT POLICIES 
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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. 
 
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THE PRIVATE SECTOR PLAN - SPEND IT SMART 
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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. 
 
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COMMENT 
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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