Banking and SMEs

Chile's banking sector has long been distinguished within the OECD financial landscape, marked by its high profitability compared to its more developed counterparts. The industry has maintained a unique structure, with barriers to entry leading to a consolidation of banks, now numbering 17 out of 25, with only two new entrants in recent years, and a focus predominantly on large corporations. Small and medium-sized enterprises (Pymes) account for just over 15% of bank portfolios, far below the OECD average of more than 25%. These businesses rely heavily on the factoring industry, which operates primarily on short-term financing and is dominated by banking holding companies. Between 2009 and 2024, the factoring sector grew from representing 1.5% of GDP to 2.7%. The Chilean banking system, backed implicitly by the state through the Central Bank, should ideally serve as a key financial pillar for Pymes and micro-enterprises, which form the backbone of the country’s business ecosystem. However, the current structure favors large corporate groups, which have access to alternative funding avenues such as bonds, stock offerings, and international banks. Banks argue that the issue lies partly in the maximum legal interest rate, but experts suggest that the primary challenge stems from the stringent requirements Pymes face to gain access to credit. These include audited financial information, collateral, and a track record within the financial system. The provisions required for loans to Pymes, considering their financial reality and history, make these loans less attractive, even when conventional interest rates are relaxed. Proposed reforms to the capital market are expected to address why banks are not adequately supporting the Pyme sector. One major factor is the high percentage of capital that can be lent to large economic groups, up to 30%, which consumes a significant portion of banks' lending capacity. While Pymes may be perceived as riskier, historical banking crises have often stemmed from loans to large institutions rather than small businesses. Experts argue that regulatory changes should allow smaller firms to issue bonds with fewer restrictions, enable pension funds (AFP) to compete in private debt markets, and create a more liquid stock market. These measures could help open up the banking sector to Pymes, which are inherently larger in number and easier to operate within than the capital market. Current regulations have created a complex framework that benefits large enterprises while making it difficult for emerging or smaller businesses to navigate the banking system. This regulatory environment has effectively distanced the banking sector from the realities of the broader Chilean economy, leaving many businesses outside the formal financial system. Analysts stress the need to reduce loan provisions for longer-term financing, lower accounting requirements, and simplify the array of regulations that currently favor large corporations over nascent or collaborative businesses. The regulator has constructed a framework that increasingly isolates the banking sector from the actual needs of the majority of Chilean businesses. The proposed reforms aim to recalibrate the balance between large and small enterprises within the banking system. By adjusting the limits on how much banks can lend to large corporations, there would be room for Pymes to access credit more freely. Additionally, reducing the burden of provisions for extended loan terms and easing accounting standards could make lending to Pymes more viable for banks. These steps are critical to ensuring that the banking sector serves all segments of the economy, not just the largest players. The success of these reforms will depend on implementing practical measures that align with the operational realities of small businesses, allowing them to thrive alongside larger entities. The debate continues over whether the current regulatory framework is sufficient to support the growth of Pymes or if further adjustments are necessary. Some stakeholders believe that the existing rules already provide adequate space for small businesses, while others argue that structural changes are essential to foster a more inclusive financial environment. As discussions progress, the focus remains on creating policies that ensure equitable access to credit and promote sustainable economic development across all business sizes.