34. Peru
In 2020, 99.5% of Peruvian enterprises were SMEs (including micro-enterprises, which employ fewer than ten persons), and they employed 89.4% of the private sector’s workforce. Compared to 2019, according to data from the National Tax Administration Bureau, the size of the SME sector decreased by 25.1% in 2020 (in terms of number of SMEs), a significant drop compared to recent years. Among these formal enterprises, only 9.4% had access to the formal financial system in 2020, increasing from 5.5% in 2019. This increase is due to the credit programmes implemented by the Government of Peru in order to face the liquidity crisis suffered by companies due to the COVID-19 pandemic.
The Central Reserve Bank of Peru (CRB) forecast an annual growth of 10.7% in 2021, thanks to a better performance of internal private consumption. It is also expected that the terms of trade will experience a slight improvement, from 8.2% to 13.0%, due to an increase in export prices. In addition, the CRB expects to maintain its interest rate low (0.25%) to foster the economic recovery, taking into account that the inflation rate is stable at around 3.0% and that the output gap is negative.
Outstanding business loans grew by 24.4% in 2020. Based on preliminary data, outstanding SME loans amounted to 32.7% of all outstanding business loans in 2020 (driven by the increase in new SME lending, which grew by 18.5%), which is higher than the share observed in 2019 (24.4%). The increase in new lending corresponds to the efforts of the Peruvian government to establish extraordinary measures that targeted specifically SMEs, for instance through the Business Support Fund for MSMEs (FAE-MYPE) and the Business Support Programme for micro and small businesses (PAE-MYPE). In other programmes, such as Reactiva Peru, 98.6% of beneficiaries were SMEs.
About 2.9% of all outstanding business loans were non-performing, which is slightly lower than in 2019 (3.2%). Non-performing loans in the SME sector experienced a significant improvement, declining from 10.9% in 2019 to 6.6% in 2020. This decline is explained by the government implementing debt moratoria.
The interest rate spread between SME loans and large-company loans fell from 19.4 to 15.8 percentage points in 2020, according to the Central Reserve Bank, which is nonetheless high by international standards. The high interest rate spread reflects banks’ significantly higher operating costs and credit risk associated with SME operations. SMEs, particularly those operating in the retail portfolio, tend to have a low degree of organisation, operate in the local market and mostly lack financial information regarding their activities. Around 57.9% of SMEs do not keep a record of their cash flows and 80% do not prepare a financing plan for their activities.
The main financial institutions that grant loans to SMEs are private banks with 93.7% of outstanding loans, urban credit unions with 4.2% of outstanding loans, and other types of financial institutions with the remaining 2.1%.
SMEs employ nearly 54.1% of the Economically Active Population (EAP) by 2020, with the rest being employed by large firms, the government, or one of the seven other types of sectors1. This figure decline by 0.9% between 2019 and 2020, mainly due to micro-firms’ employment, which decrease by 19-0% during the period. From the employment perspective, SMEs are an important engine for Peru’s economy, with around 89.4% of the private sector’s workforce in 2020.
The National Directorate of Tax Administration has a registry of existing companies in the economy, in accordance with annual billing levels. It is noted that microenterprises are well-provided since they represent 95.7% of SMEs, followed by small companies with 4.1% and medium-sized companies with 0.2% of all SMEs in 2020. As a whole the SME sector decreased by 25.1% between 2019 and 2020. It is important to note that these companies are formal because they pay taxes.
According to the Finance and Banking Regulator Authority’s preliminary data, SMEs’ share of all outstanding loans has reached its highest point in 8 years, at 32.7%.
Banks are the main source of loans for companies, though to a lesser extent for micro-firms, as illustrated in Figure 34.2. Bank credit is mainly granted in the capital city of Lima, and other main cities around the country. As for small cities and the peripheries of urban and houses agglomerations, urban credit unions are the most common suppliers of credit. Banks remain the main source of financing for small, medium and large firms with around 93.7% for the SME sector by 2020 (all loans, even if they are for consumption or for asset acquisition), while micro-firms predominantly have recourse to urban credit unions. Usually, credit unions and SME-specialised institutions have the capability to provide small loans through a faster procedure than banks. They are also more accessible to individuals and entrepreneurs.
Source: National Tax Administration Bureau and Finance and Banking Regulator Authority.
SMEs are perceived as riskier by the formal financial sector, especially when they have less expertise and skills. Around 62.9% of SMEs have a loan from only one financial institution, and 22.9% of SME have loans from two lenders, which can be banks or any other kind of institution. Only 1.8% of SME have loans with more than five financial institutions. This could be interpreted as a signal of over-indebtedness in the SME sector. Indeed, these firms may have borrowed more (not necessarily outstanding balances) than their actual turnover, and therefore may face difficulties for repayment.
Source: National Tax Administration Bureau and Finance and Banking Regulator Authority.
The spread between interest rates paid by large companies and those paid by SMEs stands at 15.8 percentage points in 2020, declining 3.51 percentage points compared to 2019. This decline in spreads is associated to a decline in interest rates for SMEs. Tor small business loans, the interest rate dropped from 22.6% and 22.2% in December 2019 and April 2020, respectively, to 17.2% in December 2020; while those for medium-sized companies did so from 10.0% and 9.3% to 6.1% during that period. The decline is associated with the easing of monetary conditions by the Central Reserve Bank, which has maintained the reference interest rate of 0.25% since April 2020, and the effect of the new credits associated with the Guaranteed Loan Program by the government.
The trend in interest rate spreads show a decline in the last years. However, it reflects the risk that SMEs can represent to the financial sector. This gap can even increase in periods of slow economic growth. These figures concern only to the main commercial banks, which are the leading providers of loans for businesses of all sizes.
The use of alternative financing sources for SMEs has increased rapidly in recent years, especially factoring and invoice discounting activities, although these financing alternatives experience high volatility each year. This uncertainty is conditioned by both supply and demand-side factors. Recently, the government has urged private firms to accept invoices for factoring. This means that in factoring operations, those sellers could indeed use their invoices for factoring with a financial institution. Commonly, this was not the case due to the refusal of a large buyer firm, arguing operating expenses. Leasing and hire purchases volumes remain higher than factoring and invoice discounting. As of December 2020, factoring and invoice discounting for SMEs reached PEN 724 billion (almost 222 million less than 2019), while leasing and purchases stood at PEN 3 204 million, according to the Tax Administration Authority and the Financial and Banking Regulator Authority.
Source: National Tax Administration Bureau and Finance and Banking Regulator Authority.
Non-performing loans tend to be common in the SME sector due to high relative uncertainty they face in their activities. Considering that SMEs are less resilient than larger companies, it is more likely that during any period of slow economic growth, they will suffer from lower sales and lower demand, which in turn directly affect their capacity for loan repayment. Larger firms, on the contrary, are more exposed to global demand and commodity prices, therefore, they are less vulnerable to internal market shocks.
Source: National Tax Administration Bureau and Finance and Banking Regulator Authority.
In 2020, the Peruvian government implemented two support programs for SMEs (Reactiva Peru and Fondo de Apoyo Empresarial- FAE-MYPE) both aimed to alleviate the liquidity problems faced by companies as a result of the closure of activities due to COVID-19. Likewise, a credit rescheduling program was implemented to control potential risks of default.
To be a company benefiting from the Reactiva Peru program, it is necessary that the company does not have tax debts, they must be classified in the Financial System as a normal client or with potential problems. On the other hand, the coverage provided by the Reactiva Peru program ranges from 80% to 98%. Likewise, the program will assign the guarantees to each company depending on the level of sales it has reached in 2019. In addition, the credit term obtained by the guarantee is up to 36 months, which includes a grace period of up to 12 months.
On the other hand, to be a company benefited by the FAE-MYPE it is necessary that the company can obtain credits for working capital and be classified in the Financial System as a normal client or with potential problems. The coverage provided by the FAE-MYPE program for loans granted up to S / 10,000 is 98%, while the coverage for loans of S / 10,001 to S / 30,000 is 90%.
Source: See Table 34.4.
References
Central Reserve Bank. (2021). Reporte de Inflación. junio 2021.
Ministry of Production (2018). Las MIPYME en cifras 2018. Obtenido de: http://ogeiee.produce.gob.pe/index.php/shortcode/oee-documentos-publicaciones/publicaciones-anuales
Finance and Banking Regulator Authority (2021).
Perú: Reporte de indicadores de inclusión financiera de los sistemas financiero, de seguros y pensiones.
Note
← 1. The sectors are: Agricultural sector, fishing, industry, mining, commerce, construction and services.