Banks are essential to the functioning of an economy: they are intermediaries connecting savers and borrowers. In simplified terms, banks take their customers' deposits, which are immediately available and risk-free (1), and use them to grant risky, longer-term loans to borrowers. and use them to grant risky, longer-term loans to borrowers. And all this is done on a leveraged basis.

Therefore, banks create liquidity in an economy and finance all economic sectors. That is why, when banks become more restrictive due to monetary policy transmission mechanisms, the economy starts to run at half speed, when banks become more restrictive due to monetary policy transmission mechanisms, the economy begins to run at half speed.. And that is what is currently happening in Chile: with higher interest rates and weak economic growth, banks become more selective, so they grant less credit, resulting in less investment and consumption, which leads to weaker production and growth.

According to the first quarter 2023 Bank Credit Survey conducted by the Central Bank of Chile, banks are becoming more demanding in providing financing:

"In the first quarter of 2023, lending standards for the consumer portfolio were more restrictive and again no change was observed in the housing segment. In the case of consumer loans, the fraction of banks reporting tighter conditions increased from 42% to 55% and no institution reported more favorable conditions. Meanwhile, for housing loans, for the second consecutive quarter, all of the banks surveyed reported no changes in their lending standards.

"Credit supply conditions continue to be limited for large firms and to a lesser extent for SMEs. The fraction of institutions reporting more demanding lending standards for large firms decreased slightly from 39% to 31%. Meanwhile, for SMEs, the proportion of banks reporting more flexible standards increased from 9% to 18%, highlighting that these are entities that have a significant share in the segment, while the fraction of banks reporting more restrictive standards remained at 36%.

Meanwhile, loan approval standards for construction and real estate companies reversed part of the moderation in the trend of restrictions observed in the previous quarter. Thus, for the first group of companies, the proportion of entities that reported stricter credit conditions increased from 30% to 40%, while, in the case of real estate companies, they increased from 36% to 46%".

It is precisely in these times private debt granted by non-bank financial institutions becomes more attractive. They are a source of credit to good quality companies that are currently underserved by banks. Therefore, there are greater investment opportunities in this neglected market and it produces efficiencies in the market, because companies are able to finance their projects, while the private debt investor has access to very attractive risk-adjusted returns, which allow diversifying their portfolio.

If you are interested in this financing strategy, we invite you to review more information on our Investment Fund FYNSA Renta Fija Fija Privada IIwhich has had a stable and positive return since its inception.

Although bank deposits are considered risk-free, there is always some level of risk associated with them. This can be seen with the last few banks that have been in trouble.

Vincent Dourthé 

Private Debt Team Fynsa AGF