Mexico: Banking reform in the works
The government has proposed new financial services laws that are intended to stimulate bank lending, particularly to small and medium-sized enterprises (SMEs). Announcing the draft legislation in May, Finance Minister Luis Videgaray stressed that the new regulatory structure would reduce the cost of credit by providing incentives to lend and boosting competition among banks, rather than by capping interest rates.
Mexico’s low credit penetration rate, particularly among SMEs, is viewed by many as a key weakness in the financial system. Gerardo Salazar Viezca, CEO of Grupo Finaciero Interacciones, told OBG that despite accounting for 74% of the Mexican labour force, SMEs receive just 15% of loans. “That is why there is a big push to promote SME lending, both from the public and private sector, by making it easier and more affordable to access credit,” he said. “This will increase not only productivity, but employment across all sectors of the economy.”
The government will certainly be looking to the new legislation to galvanise lending. Gabriel Casilla, chief economist at local bank Banorte, told OBG that at 14.9%, overall credit penetration as a percentage of GDP in Mexico was one of the lowest in the region. “When you compare us to regional neighbours such as Peru (21%), Colombia (40%), Brazil (45%) and Chile (72%), our credit penetration should be around 40%,” he said.
Among significant changes expected is a new rule that will make it easier to seize collateral in cases of non-payment. This will likely reduce the cost of lending to SMEs, allowing banks to lower their interest rates on loans.
More competition could also push down pricing. The sector is highly concentrated, with the top five lenders accounting for 73% of the credit portfolio as of March, according to the National Commission of Banking and Securities. The new rules would make it easier for consumers to gather and compare information about lenders, and banks will no longer be able to make access to one product contingent on the purchase of another. Additional changes could come later, as the proposed law calls for competition authorities to carry out a review of the system and make further recommendations.
Increased lending to SMEs is expected to provide companies with an incentive to move into the formal economy. Like many Latin American nations, Mexico has a high degree of undeclared labour and economic activity, with estimates suggesting the informal sector could account for anything up to 60% of employment. The high percentage has long been recognised as a key reason for the government’s heavy reliance on revenues other than income taxes.
A final component of the legislation seeks to mandate increased lending from the six public development banks, with infrastructure and innovation given a key emphasis, alongside SMEs.
Just how many of the administration’s far-reaching proposals will become law remains a subject of speculation at present. However, while the legislation might not make it through congress in full, the administration will be hoping that the introduction of key reforms produces wide-ranging, long-term benefits across the economy and financial system.