President Peña Nieto’s reforms fail to loosen Mexico’s credit market

Credit has come to a standstill in Mexico. The country has one of the lowest lending rates on the continent and the major aim of the financial reforms approved by the government in January was to loosen the credit market in order to provide smooth access to families and businesses. But, almost a year after the reforms were passed, the money is still only trickling in. Financing has barely grown and loans are expensive.

Besides strengthening the financial sector with a heavy injection of capital, the reforms sought to bring more transparency, promote competition and amortize risk in the case of defaults. But the government’s plan to boost the second-largest economy in Latin America by increasing lending has hit a snag. The levers are not moving. According to available records, lenders injected almost $220 million into the economy through businesses and family loans up until September. That amount corresponds to a 7.6 percent rise over the same period last year – a very low increase given the projections and the wide open market.

Bank credit represents 19.5% of GDP in Mexico, far from Brazil’s 47% and Chile’s 83%

According to the International Monetary Fund, bank credit in Mexico represented 19.5% of GDP last year, far from Brazil’s 47% and even further from Chile’s 83%. The reforms were meant to boost small and midsize businesses (SMBs), which produce more than half the country’s wealth and provide 70% of employment. Yet, only one in four of them received financing. On average, banks in the Latin America region provide loans to 47% of SMBs; in Colombia that figure goes up to 56%.

Issues related to loan applications – the quality of a business’s credit history and its ability to pay back its loans – are the most frequently used arguments to justify these low percentages. In Mexico, 60% of production falls outside the formal economic system. More than 29 million workers and small business leaders do not disclose incomes and costs or pay taxes. “It’s hard to bring that part of society into the banking system,” says BBVA Bancomer chief economist Carlos Serrano Herrera. “It’s very hard to obtain credit since they do not have payslips or verifiable balance sheets.”

The number of informal businesses has remained steady for years, despite government attempts to bring them into the formal economy by leaning on fiscal incentives. In the financial sector, the reforms have focused on limiting risk to creditors. The government’s central bank, which cannot offer direct loans to consumers, assumes part of the risk that creditors take on. The administration has also increased the channels through which banks may receive payment in the case of bankruptcies. Bankruptcy proceedings could last more than five years.

Seven of Mexico’s 44 lenders control 80% of the credit market

Gerardo Esquivel, an economist at Colegio de México, says the answer lies elsewhere. “The reasons why banks do not lend have nothing to do with risk but rather with a lack of incentives to extend financing to SMBs. Their business is lucrative enough under the current model, which focuses more and more on lending credit to the consumer where they have larger margins.”

Consumer lending is the area where financing has grown the most. Now it is at almost 10%. These transactions carry the most risk and so are the most lucrative. On average, banks offer a 27% percent interest rate on loans for cars and home appliances. Once commissions and additional costs are included, final costs can exceed 40%. The average price for lending to businesses is 8% interest but there are some complications. “A common practice among banks is asking SMBs for formal documents. If they cannot, for example, certify a full year of business activity, they receive personal loans, with much higher interest rates,” Esquivel says.

Inflation is in check and reference rates for housing and late payments are at 3% and 5%, respectively. Yet, on average, actual interest rates on home purchases fall around 12%. “The banking system in this country is highly concentrated. It lends little and at high prices,” says Raymundo Tenorio, an economist from Instituto Tecnológico de Monterrey. Seven of Mexico’s 44 lenders control 80% of the credit market. These are giant multinational companies such as HSBC, Santander and Bancomer, which collect fat dividends for their shareholders year after year.  

Translation: Dyane Jean François