This Technical Note was prepared by Emanuel Salinas and Constantinos Stephanou (World Bank).
Some information can be found in the statistics bureau INEGI (Instituto Nacional de Estadística Geografía e Informática), the social security institute IMSS (“Instituto Mexicano de Seguro Social”), the Ministry of Economy’s Sistema de Información Empresarial Mexicano (SIEM) and in household surveys, but it tends to be general, outdated or incomplete, and cannot be cross-referenced or reconciled easily to supply-side financing data.
Some data (for example, on financing by banks that have been intervened) and definitions (for example, the definition of the non-financial private sector) differ from those used by the CNBV.
These are called Unidades de Inversión or UDIs.
To be sure, most nonperforming loans that are not in banks’ books were originated in the last five years (with the exception of mortgages) and, hence, they do represent current lending activity. The main conclusions regarding credit trends do not change substantially if all NPLs are included.
See “Review and Action Plan for the Development of the Venture Capital Industry in Mexico” (NAFIN and U.S. Trade and Development Agency, 2004) for a recent description of the situation and main obstacles that impede the industry’s growth.
The recent passage of the new Securities Markets Law is expected to support greater equity financing by enhancing corporate governance and minority shareholder rights of publicly listed firms and by facilitating access to capital markets through the creation of a new corporate vehicle (Sociedad Anónima Promotora de Inversión or SAPI).
A large share of the restructured loans dates back to three main government-sponsored programs introduced after the 1995 Tequila crisis to avoid further deterioration of banks’ loan portfolios and to protect borrowers: FOBAPROA, UDIS and ADE. Under the FOBAPROA (Fondo Bancario para la Protección al Ahorro) program, banks sold mostly impaired loans to FOBAPROA (the predecessor of Instituto para la Protección de Ahorro Bancario or IPAB, the deposit insurance and bank restructuring agency) in return for 10-year non-tradable promissory notes, but retained a downside risk if collections fell short of the sale value. An agreement was reached in 2004 to convert remaining FOBAPROA notes into tradable IPAB securities. UDIS refers to the restructuring of housing, commercial and state/municipality loans by converting such financing to an inflation-indexed currency. ADE (Acuerdo de Apoyo a Deudores de la Banca), which was paid out in 1997, was mainly targeted to individual debtors and provided a discount on consumer loan rates charged by banks; an additional program of rate discounts (Punto Final) was later established and funded by both the banks and the government. See “Policy Responses to the Banking Crisis in Mexico” (Graf P., BIS Policy Paper 6, August 1999) for a brief description.
This is because new mortgage lending in pesos (i.e., financing ‘flow’) is partly offset by the decline in banks’ restructured UDIs-denominated performing mortgage portfolio over this period, resulting in a relatively small overall increase in outstanding housing finance (i.e., financing ‘stock’).
This does not necessarily imply crowding out; in fact, a recent paper (see “Mexican Banks: Lending and Profitability in the Context of Reforms, 1998-2004”, Moissinac V., IMF – Mexico: Selected Issues, December 2005) refutes the hypothesis that bank credit to the public sector – primarily in the form of FOBAPROA notes used to restructure the banking sector following the 1994 crisis – has crowded out private sector lending in recent years.
Infonavit is an autonomous, publicly administered pension fund for private sector employees that receives mandatory payroll contributions and is required by law to provide housing finance to affiliates.
Development banks have also made a few private equity investments, but these remain small in size (around US$250 million in 2005).
2004 figures are used in the analysis because of the unavailability of 2005 figures for all countries.
An interesting hypothesis, which cannot be tested due to lack of available data, is that Mexican SMEs tend to rely more on retained earnings than their foreign counterparts and would hence have relatively lower leverage ratios.
These include tiendas comerciales, casas de empeño, agiotistas, familiares, tandas, autofinancieras and armadoras. According to a recent exercise undertaken by BOM using published financial statements, consumer credit by non-financial publicly listed companies (e.g. department stores) amounted to MXP 30.7 billion, or 12 percent of total household financing.
See “México: Reactivación y Expansión del Crédito Bancario” (BBVA Bancomer Latinwatch, 2005Q3) for an overview of the reactivation in commercial bank credit and its determinants.
This is reflected in various survey-based indicators (for example, the International Institute for Management Development’s World Competitiveness Yearbook, the World Economic Forum’s Global Competitiveness Report and the World Bank’s Doing Business report) and in Mexico’s reduced global and U.S. export market share in recent years. See, for example, Hacia un Pacto de Competitividad (Instituto Mexicano para la Competitividad, 2005), “Mexico: Staff Report for the 2005 Article IV Consultation” (IMF, December 2005), “Situación México” (BBVA Bancomer, 2006Q1), and “Serie Propuestas: Ten Actions to Boost Productivity and Well-being” (BBVA Bancomer, February 2006).
See “Mexico: Creditor Rights and Insolvency Systems” (Sánchez-Mejorada y Velasco C., World Bank-OECD Insolvency Forum paper, 2004), “Background Description of the Mexican Insolvency Reform Process” (Sánchez-Mejorada y Velasco C., mimeo, 2005), “Mexican Insolvency Law and the World Bank Principles” (Méjan Carrer L.M., mimeo, 2005), “The Costs of Bankruptcy Litigation” (Gamboa-Cavazos M., Harvard University presentation, January 2005) and “Analysis of the Mexican Commercial Insolvency Law” (Martínez, Algaba, Estrella, de Haro y Galván-Duque report, 2005).
By contrast, IMSS figures show that around 3,000 companies were closed just in 2005, although most of these are likely very small and are not obliged to follow the new bankruptcy procedures (the law automatically applies to firms with a minimum debt of 400,000 UDIs).
According to bank commercial loan data in CNBV’s R04C database, the volume of loans that was more than 90 percent covered by collateral as of end-2005 was around 44 percent for micro-enterprises versus only 27 percent for large companies.
See “Amendments to Security Interest Legislation in Mexico” (Baker & McKenzie Bulletin, June 2003), “Creditors’ Rights in Secured Transactions Enhanced in Mexico” (Hill F., Los Angeles Lawyer, 2004).
For example, the 2003 reform eliminated the Barzon or non-recourse clause (which was introduced to protect mortgage debtors from losing their home and still owing money to the bank) that had allowed the uncovered portion of a loan to be extinguished in the event that collateral sale proceeds were insufficient, and clarified the use of security trust agreements that had made them cumbersome and costly for trustees.
According to “Creditor Rights and Business Financing in Mexico” (Zuñiga Villaseñor G., Banco de Mexico paper, forthcoming), the fast recovery of non-bank sources of finance implies that weak creditor rights is no longer an obstacle for the expansion of bank lending to firms and that other factors are at play.
Anecdotal evidence suggests that the length of litigation procedures for collateral foreclosure in the federal district has dropped to an average of 2-3 years, as opposed to 4-6 years prior to the 2000 reform.
Anecdotal evidence suggests that the process for registration of a security agreement in the public registry of commerce and property of the federal district might take as long as one year to complete.
This does not necessarily mean that financing has shifted from foreign currency to MXP; in fact, anecdotal evidence suggests that large multinational Mexican firms swap their domestic bond proceeds into US dollars in order to take advantage of pricing differences between the domestic and foreign debt markets.
See, for example, “The Mexican Corporate Bond Market” (Ilyina A., Background Note for the IMF Global Financial Stability Report, 2005) and “Development of Government Securities and Local Capital Markets in Mexico” (Soueid M., IMF Mexico – Selected Issues paper, December 2005).
Other examples include the creation of a central counterparty for securities markets transactions and of an organized derivatives market (MexDer), improvements in the functioning of the repo and securities lending markets, and the development of the legal framework for payment finality and the netting of financial instruments and for default insurance and financial guarantees for mortgage-backed securities.
Examples include the securitization of take-out construction loans, residential and commercial mortgages, current receivables and future flows, although most of the issues have actually been made by financial institutions; credit enhancements have also been used to raise the rating of the issue. According to the “2005 Review and 2006 Outlook: Latin American AMS/MBS” (Moody’s Investor Services, January 2006) and “Structured Finance in Latin America’s Local Markets: 2005 Year in Review and 2006 Outlook” (Fitch Ratings, March 2006) reports, Mexico continued to be the largest local securitization market by volume in Latin America in 2005.
According to the Bank for International Settlements, the amount outstanding of domestic private bonds in Mexico (a broader definition than the one used in this paper, since it includes financial institutions) was around 3.4 percent of GDP as of end-2004, compared to 23.3 percent in Chile and 12.6 percent in Brazil.
While institutional investors such as Afores are allowed to invest in bonds rated A-AAA (local scale), in practice, they conservatively restrict their purchases primarily to securities with a AA and AAA rating. As a result, these types of bonds currently comprise the large majority of all outstanding issues, which limits the investable universe to only 20-30 firms with strong credit fundamentals.
Sofoles’ more labor-intensive business model and more flexible underwriting standards have permitted them to succeed in mortgage lending to segments that banks traditionally have ignored. Sofoles have targeted households that earn between three and eight times the monthly minimum wage.
However, Infonavit continues to distort the mortgage market via subsidized interest rates in housing loans to lower-income households; see Technical Note on Housing Finance for an explanation.
See “Situación Inmobiliaria” (BBVA Bancomer, July 2005) for a recent analysis of the housing market.
Depending on the nature of the security interest to be created, the relevant agreement may require registration either with the public registry of commerce of the corporate domicile of the pledgor (i.e. for pledges without transfer of possession and for mercantile pledges) or with the public registry of property where the real estate is located (i.e. for mortgages).
Buró de Crédito operates as two firms: one in association with TransUnion (for individuals) and the other one with Dun & Bradstreet (for companies). Mexican commercial banks as a group own around 70 percent of the shares, with the largest individual stake being 18 percent. A second private credit bureau (Círculo de Crédito) has recently entered the market.
Financial institutions are required to obtain a copy of the credit history of prospective borrowers as part of the loan paperwork for loans over USD 300. A provisioning requirement of 100 percent of the loan amount may be imposed upon failure to obtain such a report.
Examples include better coordination across agencies responsible for the oversight of different parts of the credit reporting industry, analysis of whether/how the governance structure and ownership of the Buró de Crédito has affected competition, the speed of product innovation and expansion of coverage (especially the number of bureau clients), inclusion of payment information on public utility and Infonavit clients, bankruptcy or other judicial data etc.; see “Credit and Loan Reporting Systems in Mexico” (Western Hemisphere Credit and Loan Reporting Initiative, March 2005).
There is also an important conceptual difference between the possibility of using formal financing sources and their actual use (which depends on factors such as investment opportunities etc.).
There have also been smaller issues that have been placed privately to retail investors, but they are few and expensive. Anecdotal evidence suggests that an issuance size of at least MXP 300 million is required to attract investment by Afores. However, according to “The Transactions Costs of Primary Market Issuance: The Case of Brazil, Chile and Mexico” (Zervos S., World Bank Policy Research Working Paper 3424, October 2004), Mexican firms issue debt (but not equity) more cheaply than Brazilian or Chilean firms.
According the database, the number of commercial borrowers increases from 62 to 232 thousand between 2003 and 2005, but total commercial credit volume remains virtually unchanged. This can be attributed to the inclusion of guarantees by Nafin for SME loans and by the decline in credits to the government. The number of commercial credit accounts filed in the credit bureau, which increased from 1.8 million in 2000 to more than 4 million in 2005, can also be used as an indirect indicator of access.
However, the results of this survey need to be treated with caution. Firstly, the selected pool of 900 companies was drawn from a database of pre-existing bank borrowers as of 1999, implying that the sample is not representative of the corporate sector as a whole. Secondly, responses to the questionnaire are qualitative, meaning that the actual volume/proportion of funding by source is not captured. Finally, the sample has not been updated since 1999 to reflect the growth in sales turnover by some firms that might have moved them to larger-size categories; in addition, the definition of company size (based on annual turnover) differs to that used by the CNBV or the Ministry of Economy (see next paragraph).
According to the BOM, foreign supplier credit amounted to around 1 percent of GDP as of end-2005.
The Ministry of Economy’s definitions of firm size are based on the number of employees and vary by economic sector (manufacturing, trade and services). By contrast, according to the CNBV, only companies with loans from commercial banks below 900,000 UDIs are considered to be SMEs.
These include banks reporting reverse factoring arrangements with SME suppliers of large corporates as loans to the latter as opposed to the former, and reporting short-term revolving loans to micro-entrepreneurs via credit cards and similar instruments as consumer loans. However, these forms of financing are not yet large in volume.
For example, only about 15 million out of an estimated 42 million workers receive social security and other benefits; see “The Mexican Informal Sector and its Implications” (Mehrez G., IMF Mexico – Selected Issues paper, December 2005). See “Small and Medium-Sized Enterprises: Access to Finance as a Growth Constraint” (Beck T. and Demirguc-Kunt A., World Bank Policy Research Working Paper, forthcoming) on the link between access to finance and growth for SMEs.
The focus of the credit application process shifted from the characteristics of the company, provision of collateral and evaluation of the project, to basic requirements of formalization of companies and assessment of the experience and credit record of the owners-managers.
In this program, the factor (i.e., the bank) only purchases accounts receivable on a non-recourse basis by pre-identified large buyers, thereby addressing some of the SME direct financing problems linked to lack of information, risk of fraud and high transaction costs. The program has been successful in attracting large corporates and providing liquidity to their SME suppliers, while the use of an electronic platform has reduced transaction costs and fostered competition among financial institutions. See “Innovative Experiences in Access to Finance: Market Friendly Roles for the Visible Hand?” (de la Torre A., Gozzi J.C. and Schmukler S.L., World Bank, 2006) for a description and analysis.
The current chart of accounts does not allow the decomposition of bank interest income or fees by market segment or loan product, so all analysis of accounting statements is at the overall credit portfolio level.
According to preliminary figures by the ministry of economy, past due loans in this portfolio in 2005 were only 0.46 percent.
CAT (Costo Anual Total) is the effective interest rate used for comparative purposes that includes all direct annualized costs of a loan (e.g. bank commissions and insurance) excluding taxes and third party expenses (e.g. notary fees).
See, for example, “Mexico: Country-Level Savings Assessment” (CGAP, July 2005).
Since all banks are obliged to consult the credit bureau for new credit relationships, the growing coverage of the bureau can be considered as a proxy for increased accessibility, although the growth in the number of consumer records does not necessarily reflect the increased number of individual borrowers.
For example, after an initial decline in early 2001, the interest rate on credit cards (according to the Infosel series) has remained fairly stable and relatively high. However, in addition to the fact that the ‘headline’ rate does not capture the evolution in credit card commissions over this period, it is questionable whether it is representative of the diversity in credit card types and terms that currently exist in the market.
According to a BBVA Bancomer Index of Mortgage Accessibility, the cost of paying a 15-year mortgage for a median priced house (80 percent loan-to-value ratio) has fallen from a level of 2 times the median family income in 2000 to 1.1 times in 2004; see “Situación Inmobiliaria” (BBVA Bancomer, July 2005).
A breakdown of bank loans by type (i.e., commercial, mortgage and consumer) and state is not available.
See, for example, “Contract Enforceability Indicators” (Moody’s Investors Service, April 2002), “Ejecución de contratos mercantiles e hipotecas en las entidades federativas” (Consejo Coordinador Financiero, 2004) and “Doing Business in Mexico” (World Bank, 2006).
Although most public registries have established a cap on registration fees, there remain some states (e.g., Jalisco, Hidalgo, Tamaulipas and Quintana Roo) that still determine fees on an uncapped basis as a percentage of the value of secured obligations.
For example, according to the 2006 Doing Business report, the cost of registering property in Mérida (Yucatán) and Tlalnepantla (Estado de Mexico) is 2.4 and 6.1 percent respectively of the property value, while the cost of registering collateral in Aguascalientes and Ciudad Juárez (Chihuahua) is 1 and 3.2 percent respectively of the value of the loan.
For example, according to the 2006 Doing Business report, the cost of enforcing a contract in Guadalajara (Jalisco) and Mérida (Yucatán) is 5 and 33 percent respectively of the debt owed.
See, for example, “Mexico’s experiments with bank privatization and liberalization, 1991-2003” (Haber S., Journal of Banking & Finance 29, 2005). Other authors go even further and attribute the credit crunch to insufficient structural reforms and an incorrect policy response to handling NPLs–see, for example, “Why Have Banks Stopped Lending in Mexico Since the Pesos Crisis in 1995” (Gonzales-Anaya J.A., Stanford University Center for Research on Economic Development and Policy Reform Working Paper 118, April 2003) and “NAFTA and Mexico’s Less-Than-Stellar Performance” (Tornell A., Brookings Panel on Economic Activity paper, January 2004).
See, for example, “Foreign Banks and the Mexican Economy 1997-2004” (Haber S. and Musacchio A., Stanford Center for International Development Working Paper 267, November 2005) and “Foreign Banks in Mexico: New Conquistadors or Agents of Change?” (Schulz H., University of Pennsylvania working paper, forthcoming).
Private sector financing in the form of loans, bonds, and equity represents below 40 percent and 20 percent of commercial bank and institutional investor assets, respectively.
See, for example, the cases of Chile and Korea in “Situación Mexico” (BBVA Bancomer, 2005Q3).
This does not mean that commercial banks’ lending technologies cannot be used for SME loans but, given the various problems in the SME segment, it is relatively easier and more cost-effective for banks to concentrate most of their efforts on the household segment.
Some of these can be found in other FSAP Technical Annex documents.
This is important since Mexican banks have traditionally not targeted this market segment and relevant experience is relatively scarce (although not for the foreign owners of some banks); for example, even at the height of the credit boom prior to the 1994-95 crisis, consumer loans did not exceed 3 percent of GDP.
Publication of various credit accessibility indicators by state might also ‘sensitize’ states to the importance of the business environment and of enforcement of creditor rights on the amount of lending.
However, one issue that the paper does not address and that will need to be resolved is the institutional responsibility/mandate for the creation of such indicators.
For instance, loans to SMEs that involve invoice discounting are currently recorded by banks in the credit bureau as loans to large corporations (i.e., to those firms whom the SMEs act as suppliers).
A more speculative idea would be the creation of a CNBV-managed, industry-wide SME credit scoring platform in which all credit institutions would be obliged to provide minimum standardized information that could be used to calculate generic SME credit scoring models by size, sector and location; these could then be utilized (and improved upon based on other proprietary information) by all market participants.
Examples include the USA’s Small Business Administration program, Spain’s Fondo de Titularización de Activos Pyme, and Germany’s KfW-managed Programme for Mittelstand Loan Securitization.