More than a month into a lockdown that has paralyzed the economy of Colombia, its banks are holding back on lending to micro-businesses and small and medium-sized enterprises despite a 16 trillion-peso guarantee program from the government that will back up 90% of new loans to the sector.

The disbursement of loans to micro-companies and SMEs dropped 18% in the first three weeks of April from the year-ago period and contracted 39% compared to the first three weeks of March, the latest data available from the financial regulator shows. Although average interest rates for these loans have been edging downward, some large banks, including Bancolombia SA and Banco de Bogotá SA, are notching them up.

Colombia's sustained GDP growth over the last two decades boosted banks' loan disbursements to the segment, which accounted for 53% of banks' total commercial portfolios in 2019, not counting business overdrafts and credit cards. A decade ago, loans to micro-companies and SMEs represented 43% of total commercial portfolios, according to the Superintendencia Financiera financial regulator.

But since the onset of the coronavirus pandemic, banks have been readjusting their lending strategy as they brace themselves for weaker operating conditions, especially in the SME and consumer sectors, which banks had been eyeing in the first months of the year.

"The increased perception of risk has slowed down credit analyses, which has hindered disbursements," Alejandro Vera, technical vice-president of Colombia's Asobancaria banking association, told S&P Market Intelligence. Until now, banks have allocated most of their resources toward the renegotiation of existing loans, he added, pointing to the fact that as much as 25% of lenders' total aggregate portfolio, or approximately 124 trillion pesos, has been granted grace periods.

To counter increased risk levels, the Colombian government, led by President Iván Duque, on April 6 launched a 12 trillion-peso program to back 60% of loans granted to micro-companies and SMEs to ensure liquidity in the financial sector. When banks still seemed hesitant, the program was revamped April 16 to back up to 90% of such loans, while the budget was also expanded to 16 trillion pesos.

For Vera, the government's new 90% guarantee scheme will be enough for many companies to access loans, for which there will be "significant appetite," but it will not be enough for all. "Banks will now be able to rapidly disburse those 16 trillion pesos, but the National Guarantee Fund will probably have to announce more programs in order to keep helping the population," he added.

On April 24, after meeting with the president, Asobancaria said in a press release that since April 20, the banking system had received "56,413 guarantee scheme loan requests amounting to 4.7 trillion pesos," of which "2.8 trillion will become credit for 33,085 micro-companies and SMEs to pay their wages."

Duque is among the most vocal critics of banks' reluctance to disburse in this new context, calling for "a collaborative attitude from banks." In statements to local press, he said there was no excuse for not disbursing loans that are backed by a 90% state guarantee and has vouched to keep financial institutions "who may want to act like vampires" in check.

The president has not been alone in requesting that banks open the tap to SMEs, which account for 80% of all employment in the country. "Even with the government's support of 90% ... we continue to face difficulties in accessing credit" and "don't have [the funds] to pay wages this April 30," Gustavo Toro, the head of the Hotel and Tourism Association of Colombia, or COTELCO, told senators in a virtual session April 21. The sector, made up mostly by SMEs, employs approximately 110,000 people, he said.

Still not convinced

Banks, however, aren't entirely convinced by the government's 90% guarantee scheme. "Colombia is a deficit country, it is not Switzerland," said Alianza Fiduciaria S.A. income analyst Iván Felipe Agudelo.

"Disbursements are down in all loan types because the probability of default has risen across the board," he said, adding that even with such government backing, "granting a loan right now means higher provisions down the line."

But with bankruptcies likely to shoot up as the economy contracts, banks might still prefer to avoid the risk altogether and wait this one out.

On the other hand, Omar Suárez, a variable-income strategist at Casa de Bolsa SA Sociedad Comisionista de Bolsa, said that although the probability of delinquency is much higher now, making granting loans more difficult, the new 90% guarantee will be effective in reducing banks' perception of risk.

"Banks' operations had also slowed down as a whole, with the majority of employees working from home, but they have already been very flexible in restructuring existing loans," he said, adding that banks have a "huge responsibility, because the money they lend comes from depositors, and they must have it available for withdrawal."

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As of April 28, US$1 was equivalent to 4,050.10 Colombian pesos.