Down to the Green Door

Mexico’s largest consumer credit operation cannot hassle its debtors with annoying letters or phone calls. Mexico’s mail system is unreliable and only 10% of the population has a phone. Instead, an army of 4,000 collection agents employed by retailer Grupo Elektra is equipped with motorcycles and hand-held computers loaded with customers’ data, including how to find them. And since Mexican addresses are notoriously vague, the information can be quite precise. One entry reads: “Take the first left after the church. Two hundred meters down the road in front of the big tree, there is a five-story, white apartment building with a green door.” The collectors show up on the debtor’s doorstep to personally demand repayment.

“In consumer finance, you really rely on two basic elements, information and communication systems,” says Alvaro Rodríguez, vice president for finance and administration at Elektra. In a developed economy, it is easy to determine if someone is creditworthy and it’s relatively easy to collect late payments. “Here you have to do your own investigation and that takes a lot of specific knowledge and it is very expensive,” he says.

Elektra is the largest appliance retailer in Mexico and the largest consumer credit company, with a loan portfolio of $450 million. Major Mexican banks are beginning to muscle into this business, attracted by exceptionally high returns. Interest on a $1,000 personal loan can go as high as 60% a year, plus a 5% commission. In turn, a growing number of finance companies, or Sofoles, have branched out into mortgages, auto, personal and small-business loans. A severe housing shortage and the recent credit crunch in Mexico has created unprecedented demand for home loans.

Catering to Small Borrowers
Total loans outstanding from Sofoles rose 33% last year to $6.9 billion at a time when banks were cutting back lending to consumers and small companies. These smaller scale tend to be the main markets for Sofoles, and borrowers are grateful for access to credit even at punishing interest rates. Interest rates are high because default risk and administration costs are high. The penetration of credit bureaus to determine borrower risk in Mexico is relatively low.

Banks still lack Elektra’s sophisticated systems or its quantity of consumer data. Says Rodríguez, “Large financial institutions will surely try to penetrate the consumer finance market in Mexico, but it is going to take them time to climb the learning curve and have an efficient enough operation to be profitable.”

However, there is probably room for plenty of new competitors since consumer finance loans in Mexico are equivalent to 1.5% of GDP, less than one-tenth of the US level. US corporates as well as large banks have set up Sofoles. Ford Credit Co. and General Motors Acceptance Corp. together have some $3 billion in outstanding auto loans. Citicorp’s CitiFinancial had a stake in Crédito Familiar, a Sofoles majority-owned by Bancomer. It offers loans to people without a credit history, basing its lending decisions on applicants and personal and professional references.

Other banks are continuing to develop systems and marketing capabilities to expand their consumer lending. And finance companies, which are not allowed to take in deposits, are finding it harder to fund themselves. Banks can use their deposit base and other sources of funding to expand into consumer lending. The Sofoles have had to use their parent company, the banks, or the government as sources of funding.

Elektra has also financed itself by securitizing consumer credit receivables. So far, the company has issued eight asset-backed securities, most recently in July. “We have securitized almost $370 million and that has given us quite a bit of access to capital,” says Rodríguez.