Mexico to Unveil Bank Reform Tuesday in Effort to Boost Lending

Published April 22, 2013

Dow Jones Newswires

Mexican President Enrique Pena Nieto plans to present a broad financial-reform proposal early Tuesday that aims to raise Mexico's low rate of lending to the private sector, which in turn is seen boosting economic growth.

Private-sector credit as a percentage of gross domestic product in Mexico stands at 27.5%, one of the lowest rates in Latin America, according to Standard & Poor's. The rate in Brazil is 53.5% and in Chile it's 77.9%. Excluding credit from government-run mortgage companies and other nonbank lenders, private lending falls to just 18% of Mexico's GDP. The Mexican economy is Latin America's second largest.

Bankers say they are all for change, as long as the government doesn't mandate lower interest rates or oblige them to bestow credit that is likely to default.

The reform is expected to call for the creation of a universal credit bureau that includes more measures of creditworthiness, and to speed bankruptcy proceedings and asset recoveries. The proposal would build on education and telecommunications reforms that have already passed Congress as part of a drive to improve Mexico's competitiveness on the international stage.

The Mexican bankers' association and officials at the country's two-largest banks declined to comment ahead of the official unveiling of the reform.

In an interview published in Mexican daily El Financiero, Luis Robles, executive president of the bankers' association and president of the board at BBVA Bancomer, the country's largest bank, said the bankers' association sent a series of suggestions for the reform. In particular, the banks proposed creating dedicated bankruptcy courts to speed the recovery of assets in cases of nonpayment.

Bankruptcy proceedings initiate in local courts and wind their way to federal courts, making the road to asset recovery a long and costly one, according to El Financiero, which says it takes around five years to resolve a typical bankruptcy. And foreclosing on a mortgage, according to S&P, takes on average between three and five years, depending on the regional government and the strength of the borrower's legal defense.

This slow and costly recovery of collateral is directly related to interest rates, Mr. Robles said.

According to 2012 data from the Mexican central bank, the average interest rate on credit-card debt in Mexico is 25%, while the average rate for a car loan is 12%. One of the lowest home-mortgage rates currently in the market is a 20-year loan at 8.75%, offered by HSBC.

Last year, the 42 banks that Mexican banking and securities regulator monitors reported a combined credit portfolio of 2.75 trillion pesos ($224 billion), up 12% on the year, while deposits increased 9% to MXN3.22 trillion. As of Jan. 1, Mexican banks had all complied with the first stage of Basel III minimum capital requirements, well ahead of most international peers.

Mexican banks are conservative in their lending and capital levels in large part because they have been burned by spikes in defaults in the past when they have attempted to quickly loosen credit.

The country's two largest banks are units of Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC) of Spain and Citigroup Inc. (C) of the U.S., which together control 39% of Mexican bank deposits. Mexican bank Grupo Financiero Banorte SAB (GBOOY, GFNORTE.MX) and Grupo Financiero Santander Mexico SAB (BSMX, SANMEX.MX) round out the top four.

The Reuters news agency reported that, under the proposal, the government could limit a bank's securities-trading efforts if it deems that the bank's lending levels are too low. The news agency didn't specify what amount of credit the banks would be expected to offer. Such a measure might be construed as interventionist.

Mexico's modest 13% annual expansion of credit in recent years, compared with 20% for Brazil, looks in hindsight to have been a blessing, says David Rees, of London-based Capital Economics. "Rapid credit growth can be a double-edged sword for emerging markets: while it can result in a period of very fast economic growth for a time, this often creates financial vulnerabilities that lead to a period of much weaker growth later on," Mr. Rees warned in a report.

"In Brazil, the rapid expansion of lending over the past decade means that debt-servicing costs now eat up nearly one-fifth of household incomes," he added.