Is easy credit coming to Mexico?

Miguel Ángel Riva Palacio stuffs his savings in his sock drawer. He pays his bills and expenses with cash, doesn’t have a bank account, and never uses debit or credit cards – neither of which are accepted at the mom-and-pop dry cleaning shop he’s worked at for the past 43 years.

“It’s something that has never interested me,” he says of opening a bank account.

Mr. Riva Palacio is among the millions of Mexicans operating outside of a banking system that has produced robust profits in recent years, but has failed to embrace customers among the unbanked or extend credit to entrepreneurs. Mexico has one of the lowest rates of commercial lending in Latin America, which has been blamed for stunting economic growth.

But a series of banking reforms introduced Wednesday by a coalition of political parties aims to change that. The legislation aims to encourage competition among banks and increase the accessibility and accountability of financial institutions. It also intends to create incentives for lending to both individuals and the private sector. 

“It is a reform that will encourage banks … to lend more and for lower rates,” President Enrique Peña Nieto said in announcing the reform proposals.

Banking sector that 'lends little'

The Mexican government projects an economic expansion of 3.5 percent in 2013 and President Peña Nieto is promoting a series of economic reforms in areas such as energy and taxation, which he says will tack an extra two percentage points annually on to the country’s GDP growth in future years.

But banking has long been a sore spot in an otherwise optimistic economic outlook, especially since Mexican financial institutions lend little in comparison to their counterparts in other emerging markets. What credit is extended often goes to state governments, whose debts have swelled, or is lent at high interest rates. Many credit cards carry interest rates often topping 40 percent.

“Mexico has ... a solid banking sector. However, it’s a banking sector that lends little,” Finance Minister Luis Videgaray Caso said at the unveiling of the reforms.

Bank credit amounts to just 26 percent of GDP in Mexico, according to Mr. Videgaray. This compares to more than 50 percent of GDP on average in Latin America and nearly 100 percent of GDP in Chile. Mexico boasts solid macroeconomic fundamentals with relatively low inflation and interest rates, and a stable currency. But Videgaray said that fundamentals have been insufficient to boost economic growth due, in part, to the lack of bank credit available to businesses and entrepreneurs.

Mexican banks lend just 43 percent of their assets to the private sector, Videgaray said, compared to the Chilean rate of 73 percent.

The financial reforms – not to be confused with a long-pending fiscal reform meant to raise more non-oil revenues for the government – propose overhauling bankruptcy proceedings, which currently can drag out for years. It would also make it easier for banks to foreclose on debtors.

The Association of Mexican Banks issued at a statement Wednesday, saying it supported the objectives of the financial reforms and would study the issue further.

Mexico's banking 'star' status

Mexico’s banks have been characterized as stable and profitable internationally by acting conservatively and charging high fees. These actions have produced big profits at time when their counterparts abroad were being bailed out.

Much of Mexico's bank lending in recent years went to state governments, whose loans were considered low risk, according to central bank governor Agustín Carstens, because federal government transfers to the states were used as collateral. Banks also bought government bonds, which provide higher profits with less risk than lending to the private sector, says Manuel Molano, adjunct director of the Mexican Institute for Competitiveness.

Most of the banks are foreign-owned and analysts say the Mexican subsidiaries of institutions like Citibank, or Spanish-owned Banco Bilbao Vizcaya Argentaria and Banco Santander have been among the best performers for their parent companies during tough economic times.

“These are the stars in the worldwide networks of these banks,” says Roberto Sánchez, administration professor at the Iberoamerican University in Mexico City.

The star status is a reversal of fortune for Mexico’s banks, which were beset by nationalizations, botched privatizations, and bailouts over the past three decades. The bailouts surrounding Mexico’s peso crisis of the 1990s became controversial as bank owners were perceived to have received sweetheart deals, while everyday Mexicans went broke, Mr. Sánchez says.

Some left-wing candidates still campaign on the outrage generated during the bailout and rail against banks and their tightfisted practices.

“This goes right to one of [the left’s] main proposals, which is to boost credit,” Eduardo García, founder of the online financial publication Sentido Común, says of the reforms.

‘Lending culture?’

How much of a difference the reforms make remains to be seen. Only 21 percent of Mexicans save their money through a bank, according to a recent Consulta Mitofsky survey. Informal methods of borrowing and savings, hiding cash at home, and using poorly regulated credit unions remain common.

“I don’t know how much the lending culture exists, how much people want to borrow,” Mr. García says.