Mexico has a gleaming set of new banking laws to replace rules that date back to 1943, but much more must be done to get the banks to start lending again. “It’s a big improvement,” says Robert Chandler, acting chairman and CEO of Grupo Financiero Banorte. “But first we have to see it functioning and tested. It’s still going to be three years before anyone can arrive at any concrete conclusions or policy modifications.”
Yet almost anything was better than maintaining the status quo. Mexico has the strongest economy in Latin America, but its banking system is among the weakest. The banks have yet to fully recover from the effects of the devastating 1994-95 peso crisis. They remain undercapitalized and unwilling to lend. Last year, when the economy grew 3.7%, bank lending actually fell.
Ultimately though, Mexico must shed a culture of non-payment that sprang up in the wake of the peso crisis, when interest rates rose and many Mexicans stopped paying their loans. To their surprise and horror of the banks, the courts sided with the borrowers.
The new rules, which Congress approved in May, are meant to encourage lending by making it easier for companies to post collateral and enable banks to recover collateral quickly when a borrower runs into trouble.
The banking industry had long been pushing for an updated system of collateral. “It gives us new instruments to offer credit,” says Luis Manuel Meján, legal advisor to the Mexican Bankers Association. “And the process of recovery of collateral in case of default is much more agile and gives more confidence to the financier.”
For example, under the old rules, a small business wanting to use new equipment purchased with a loan as a loan guarantee would have to actually leave the machine itself with the bank or a third party. “This was completely absurd,” Meján says. “Now the owner can just sign some papers, and continue using the machine profitably while the loan is paid off.”
Non-bank lenders such as suppliers or finance companies are likely to begin emerging in greater numbers. And of particular importance to Mexico’s credit-starved retail sector, companies can post their inventory as collateral for loans.
A Capricious Judiciary
The new bankruptcy process is a clear improvement over the old system, although the professionalism of a new institute of mediators and liquidators, chosen by the courts and appointed to oversee the finances of defaulting companies and individuals, remains a question mark. The institute, likely to have several dozen members at the start, must by law be chosen by mid-June. Bankers fear the institute could become politicized or degenerate into a sinecure for party hacks.
Jorge Marín Santillán, president of CCE, a business group, agrees that the laws look good on paper, but worries how the notoriously capricious Mexican legal system will enforce the law. The CCE recently analyzed the performance of the country’s judicial system. “Some states didn’t do very well,” Marín notes dryly. “We can have nearly perfect laws but if the judiciary doesn’t apply them, it would not help us at all.”
Nevertheless, lending could resume at the end of this year or the beginning of next, provided the economy keeps growing and banks are recapitalized. The possibility of bankers offering big credit lines raises the specter that the industry will again find their credit portfolios full of high-risk loans. Most observers believe however, that Mexican banks will be more cautious about assessing credit than they have been in the past. “If you look at credit trends over the last few years, it’s clear to me that the banks have learned their lesson,” says Paul Warme, Mexico banking analyst with ING Barings. “They’ve been very cautious, and they will continue to be, going forward.”
But Warme says that Mexican banks still offer many commercial loans without the covenants and strictures common in the US and Europe. “That’s just bad lending and it means their loan portfolios are weaker,” he says. “The influence of the foreign banks will be positive here because they will insist on these sorts of things.”
Main elements of Mexico’s new banking laws:
A package of reforms to existing laws regulating loan collateral, which will allow borrowers without significant cashflow to constitute collateral with greater ease using a variety of assets, including inventories. Furthermore, the new law’s clearly defined procedure on how collateral is foreclosed affords both lenders and borrowers more security on what will happen in case of default.
The updated bankruptcy law streamlines what was once a lengthy, complex and costly court process that rarely left the banks with many assets when they finally took control of a bankrupt company. The new process, employing court-appointed mediators and liquidators, gives lenders and borrowers a year to negotiate an agreement, after which time control of the company is quickly taken over by the court.
A new law regulating electronic commerce establishes procedures for electronic payments and creates legal channels for resolving disputes. Development of e-commerce in Mexico was blocked by a requirement that only original signed documents were evidence of contractual obligations.