An Analysis of the Cost of Credit in Peru

This study analyzes the evolution of the components of interest rate from 2010 to 2014, to explain the disparity in lending rates between different groups of borrowers (segments) and levels of these rates relative to deposit interest rates in the Peruvian credit market. We conclude that operating costs and credit risk are the main factors that explain the level and disparity of interest rates. Also, we find that competition in the banking system has caused that financial institutions become operationally more efficient in all segments. On the one hand, competition in consumption credits and loans to small and micro enterprises is between financial institutions. On the other hand, competition in the segment of wholesale companies also involves the capital markets. Finally, we find that interest rates of loans denominated in Peruvian currency are much higher than loans denominated in U.S. dollars. This difference is due to loans denominated in dollars are concentrated in lower-risk debtors of each segment. (Audio: Department of Economic Publications)