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Mexican Senate approves financial reform

Nov 27, 2013

Part of Peña Nieto's reform package, the bank bill changes the bankruptcy code - but analysts are uncertain of the long-term impact

     
     
     

By Lucy Conger

Mexico's Senate voted by a landslide margin Tuesday to approve a financial reform bill that that aims to promote bank lending, particularly to small and medium sized enterprises.

The bill makes it easier for banks to collect on bad loans and will set regulations on financial groups. It was passed with 90 votes in favor from the ruling PRI party, its ally the Green Party (PVEM) and the conservative PAN party. The 24 votes against were from three opposition parties on the left.

The financial reform gives a mandate to the nation's development bank Nafinsa to guarantee commercial lending to SMEs. It streamlines Mexico's bankruptcy process and installs specialized judges, strengthens protection for financial service users, and will change some financial group regulations, although details there are still to be determined.

Under the new rules, fully foreign-owned companies will be able to offer insurance and leases. The reform also stipulates that the central bank, the Banco de México, will regulate bank fees and interest rates on lending.

Still, the reform constitutes less progress than meets the eye, analysts suggest.

Banks favor low-risk government lending, and a recent decision to tolerate a federal deficit means credit to the private sector could be crowded out. "The government is trying to reform to increase bank lending and at the same time it is going into deficit spending this year," independent economist Jonathan Heath tells LatinFinance.

The reform creates a more workable bankruptcy law and promises more expeditious resolution of cases that can take years to resolve.

"The most important thing in Mexico is improving [lenders'] ability to take an asset back. The reform gets rid of some distortion," says John Welch, executive director, macro strategy for Latin America at CIBC World Markets. Collateral from loans to the large, but risky, segment of SMEs will be enhanced with guarantees from development banks.

"It is an improvement, but a subsidy on collateral. I don't think it will have a massive effect," says Welch. The fact that small-scale startups in Mexico last on average just two years limits lending to the sector, according to Heath.

The reform, which involves changes to 34 laws, is the latest in a series of modifications to Mexico's financial system over the past 20 years. "There will be a continuous reform process rather than a definitive reform, a process of putting new things in place," says Welch.

With the laws approved by the Senate, they will take effect once signed by President Enrique Peña Nieto and subsequently published in the Diario Oficial, the official government bulletin. The process is likely to be completed by year-end.

Bank penetration in Mexico is one of the lowest in Latin America. Recent figures show that fewer than 20% of adults hold a bank account, and lending to the private sector is less than 30% of GDP.

The Senate's approval of the bill brings Peña Nieto one step closer to approval of a full package of reforms he has pledged will transform Mexico. One of the most ambitious of those is the pending energy reform that would open the state oil company, Pemex, to private investment. Securing agreement on the energy reform remains tough but it is predicted to pass nonetheless before the year is out. LF



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