Interview: Alejandro Valenzuela del Río
To what extent can financial reform help to increase credit penetration?
ALEJANDRO VALENZUELA DEL RIO: The level of loans issued by commercial banks to the non-financial private sector is equivalent to 15% of GDP. This is not only significantly below developed economies’ standards, but also below the credit ratios of emerging markets. In Peru the figure is almost 25%, Colombia is slightly above 40%, Brazil is close to 50% and Chile is above 70%. While historical factors can partially explain why Mexico's loan ratio is so low, such as nationalisation of the banking system in 1982 and the 1994 banking crisis, the key reason stems from two features of the economy, specifically the large number of workers and firms in the informal sector, and the difficulties banks face in recovering collateral. On average, it takes three years for commercial banks to repossess a house on which the mortgage is delinquent. However, this can stretch to as much as seven or even 10 years. As a result, commercial banks are not in a position to lend to many segments, particularly small and medium-sized enterprises (SMEs) and low-income families that either operate in the informal sector or are high-risk potential clients, whose assets, if there are any, are not easy to repossess. Banks want to lend more, of course, but the high probability of default and problems associated with repossessing collateral make it almost impossible for the time being.
The reform does not directly address informality, but it does tackle collateral-recovery processes by creating specialised courts and judges, as well as making the repossession procedure itself simpler. Development banks will also be allowed to increase the guarantees given to commercial banks regarding loans for SMEs.
Brazil did something similar in 2006, with its “alienação fiduciária” reform, under which the government improved banks’ ability to enforce contracts with their clients. This reform, in addition to higher growth rates, allowed the credit penetration ratio to rise from 18% in 2006 to its current level of close to 50%. In this context, using quite conservative assumptions for Mexico, such as GDP growth rates of 2.5% to 3%, the credit-to-GDP ratio could reach at least 20% within five years and increase to 40% by 2025.
Where is the credit demand coming from?
VALENZUELA: The demand is widespread across all economic sectors. In particular, there is an appetite for working capital among SMEs, which do not have access to bank credit, but have access to non-bank financing sources, albeit at an enormous cost. Further, other structural changes, such as the energy reform, will push up credit demand, not only from companies directly related to the sector, but also from those developing infrastructure and providing other services associated with increased economic activity. Household credit is also key, particularly in terms of mortgages, given the population and household-formation-driven housing demand. To this end, easing repossession procedures will allow banks to offer better credit conditions.
Given that the leading five banks in Mexico currently provide almost 70% of loans, do you have any concerns about sector competition?
VALENZUELA: In our view, the banking industry in Mexico is already quite competitive. In terms of market share by product, smaller banks have increased their share over large banks in recent years. Interest rate spreads between the monetary policy rate and lending rate have tightened significantly, and interest rate differentials between banks have also declined.
We have even observed “interest rate wars” in the mortgage business lately. Also, it is worth noting that the government has issued more bank operating licences in the past 10 years, which has fostered competition among market participants.
Finally, it is important to mention that, in the future, technology will enable sizeable cuts in transaction costs, while barriers to entry for new players will be lower, therefore boosting competition among banks, reducing prices and improving the quality of service.
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