OREANDA-NEWS. The liquidation of nonbank financial institution (NBFI) Estraval and the losses related to privately sold pools of payroll deductible loans (PDL) with recourse to Estraval highlight risks potentially facing the Colombian consumer ABS market, Fitch Ratings says. In our view these risks include the limited regulation of Colombian NBFIs and risks to underlying PDLs, such as borrower unemployment, life insurance settlement misuse and prepayments.

Colombia's Superintendencia de Sociedades forced Estraval to liquidate after it became clear that Estraval had double-pledged portfolios of PDLs, which were underperforming due to borrower unemployment, life insurance settlements that were not used to pay off loan balances, and prepayments that were eating away at expected yield on the collateral. The double pledge was exposed after a rise in obligor delinquencies led to a cash shortage.

PDLs are bank loans to individuals that are repaid by automatic deductions from the borrower's salary. They have grown very quickly over the past three years as defaults rates are low and interest rates on the loans are high (between approximately 15% and the statutory maximum of 30%). Their terms are shorter than seven years. The growth of PDLs has also contributed to the growth of NBFIs. NBFI-originated portfolios are estimated to be 10% of Colombia's GDP, which are largely not regulated.

PDLs, known as Libranzas in Colombia, are regulated by law 1527 of 2012. However, when NBFIs are the lender and sell pools of PDLs that are unrated, oversight is lax.

Over the long term, a rise in unemployment is a risk for all pools of PDLs. As Colombia's recent growth has led to historical lows in unemployment rates, we do not expect this risk to materialize for some time.

Fitch's outlook for Colombian PDL securitizations is broadly stable. Fitch-rated transactions incorporate structural features that mitigate the aforementioned risks through eligibility criteria, servicers or master servicers with high levels of operational experience, constant portfolio monitoring and clear legal protections related to the custody of assets. Additionally, Fitch - rated transactions have significant credit enhancement and performance triggers that allow investors to take preventative actions prior to events leading to significant losses.