Rules applicable to foreign indebtedness of privately owned companies and individuals in Colombia change frequently due to the sensitivity of the monetary conditions within the country as a result of the flow of foreign currencies from different sources such as investments, government indebtedness, and credits from foreign banks or other foreign financial entities to Colombian residents.

The regulations allow Colombian residents to obtain financing in foreign currencies for financing exports (generally referred to as "prefinanciación de exportaciones"), and for other purposes.

Both types of financing are subject to the requirement of a deposit in Colombian currency with the Central Bank, and in both cases the Central Bank reduced it to 10% by Resolution 10 of September 18, 1998. It has to be highlighted that before said decision, Resolution 7 dated June 7, 1997 applied a 30% deposit. This Resolution was modified by Resolution 9 dated February 3, 1998 that reduced the deposit to 25%. The deposit must be maintained with the Central Bank for six months in the case of general credit, and for thirty six months (with some exceptions) in the case of financing for exports. The exceptions actually create incentives for exporters to evidence the export within four months from the date the financing was obtained.

When the deposit requirement was first established, it applied to short term indebtedness (i.e. less than thirty six months.) Resolution 5 of 1997 made the deposit requirement applicable notwithstanding the term of the loan.

The initial objective of these deposits was to impose barriers to the increasingly large amounts of financing Colombian residents obtained from foreign financial entities, which according to the Central Bank resulted in additional pressures on the inflation rate.

Resolution 10 above mentioned was designed to soften those barriers, at a time when high interest rates in the domestic market indicated there was a lack of funds for short term credit needs of domestic companies.

The deposit is not mandatory in the following cases: (i) for credits obtained to finance Colombian investments in other countries; (ii) for credits granted through credit cards for personal expenses; (iii) for credits to finance exports with a term lower than one year granted by financial entities using resources of BANCOLDEX (Colombian export credit bank) up to US$550 million dollars; (iv) for soft credits granted by foreign governments.

The deposit requirement is summarised in the following chart:

Foreign indebtedness         Financing of exports          Financing for 
of Colombian residents                                     general purposes

Term:                        Preferably less than          Not regulated.
                             four months. 

Interest rate:               Maximum 20% per year.         Maximum 20% per year.

Delinquent interest          Maximum 25% per year.         Maximum 25% per year.

Deposit requirement:         10% of the value of           10% of the value of 
                             the loan                      the loan.

Deposit returned:            After thirty six months       After six months.
                             or less if export is made
                             in a shorter term.

Exceptions to mandatory      No                             Yes

By Ernesto Cavelier.

(c) Parra, Rodriguez & Cavelier 1998.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.