Peru’s Velarde condemns interest rate cap law

Julio Velarde, governor of the Central Reserve Bank of Peru (BCRP), has condemned a law that empowers the central bank to cap interest rates.

The Congress of Peru passed the Law for the Protection of Consumers in Financial Services, on March 12 by a vote of 85–8. The vote overrode objections made by the president, Peruvian media reported.

The law states that interest rates will be “freely designated within the limit established by the Central Reserve Bank [of Peru]”. Penalty interest rates for delayed payments will be set in line with the central bank’s “operations outside the financial system”. The central bank will have the power to set maximum and minimum rates at twice-annual meetings. Interest rates exceeding the central bank’s limits will be deemed “usurious” under the law and criminalised.

The statute amends Article 52 of the 1992 central bank law, which grants the BCRP powers to set policy rates and, “exceptionally”, market interest rates in the financial system.  

Álvaro Castro Lora, a director at the Sumara Hub Legal, a law firm in Lima, told Central Banking through an email that these “exceptional” powers are part of the central bank’s mandate to ensure monetary stability. The original provision was not designed as an anti-usury law.

On March 19, Velarde said that the central bank would enforce the new law, despite his objections. He said that the law “would have no macroeconomic impact” and would only serve “to exclude the people with the least access to the financial system, the poorest”.

Jorge Guillén Uyen, former vice-president for research at Esan Gradúate School of Business in Lima, told Central Banking the law is “a populist act, which seeks more political profit than the welfare of society”.

In emailed comments, he suggested that the law would cut off formal, regulated lending by savings banks and microfinance institutions. As a result, many seeking credit would turn to unregulated moneylenders, “generating informality and usurious loans”.

Recession compounds political instability

Peru has been hard hit by the Covid-19 pandemic. The IMF projects that GDP diminished by nearly 14% in 2020. A March 2021 IMF report described the banking sector as “resilient”, but noted profitability had fallen due to “low demand for credit”.

Politically, Peru has suffered through several years of instability. Scandal compelled the resignation of president Pedro Pablo Kuczynski in 2018. Congress removed his successor, Martín Vizcarra, in November 2020, installing its own presiding officer, Manuel Merino, as president. Some argued this was a coup mounted to protect corrupt legislators. Merino in turn resigned after a week of street protests. Congress then elected Francisco Sagasti as its speaker and thus interim president.

Peru will be holding general elections in April. As Peruvian parties tend to be weak, the next legislature will be highly fragmented.

History of the law

Several members of Congress introduced anti-usury proposals in Congress in 2020. The consumer protection committee consolidated these proposals into a single bill, which the legislature approved the bill in December. However, Sagasti declined to sign the law. The president’s office returned the text to Congress in the first week of February.

In an accompanying report, the president stated that imposing interest rate limits would be “an extreme form of state intervention” and “would harm the principle of free competition”.

In an explanatory memorandum attached to his proposed version of the law, congressman José Luna Morales wrote that his proposal “would not harm the market economy but, on the contrary, permit just regulation”. The memorandum states that the central bank will “utilise market instruments and criteria to determine [interest rate caps]”. Morales said that the measure will only apply to “consumer credit”, such as credit cards.

The consumer protection commission of Congress, responding to the president’s objections, noted that the Civil Code already allows the central bank to set maximum interest rates.

Constitutional challenge expected

Two industry associations – Asbanc, for banks, and Asomif, for microcredit institutions – said they would challenge the law before the constitutional court. Asomif president Jorge Delgado said that the industry bodies would also seek injunctions against the law, Lima newspaper La República reported. In a post on Twitter, Asbanc claimed that the law violated the constitutional right to make contracts freely.

Asbanc and Asomif have also created a website to campaign against the law. The site claims that the measure will lead to financial exclusion and harm the microfinance sector.

Castro Lora says the constitutional tribunal is not likely to accept the argument that the law impairs the right of free contract. Peruvian law allows interest rate caps in the non-financial sector and that provision has escaped any constitutional challenge.

Castro Lora argues a stronger argument against the law is that the constitution gives the central bank only one mandate – monetary stability. To give the BCRP the power to combat usury, Congress would first have to amend the constitution to grant the central bank an additional mandate.