Mexico’s government unveiled a series of financial reforms today to be sent to congress. The most important measure encourages banks to lend more to businesses by giving them new powers to seize the collateral of borrowers who fall behind on their payments.
Here’s how it’s supposed to work:
- Banks in Mexico make very few loans to the country’s small-and-medium sized businesses, which create almost 75% of the country’s jobs but get just 15% of credit, according to the finance ministry. Lending to Mexico’s private sector makes up 26% of the country’s GDP, the lowest rate in Latin America.
- Banks will issue more credit if they are allowed to seize collateral. Analysts say the inability to seize debtors’ assets has been holding back private sector lending. But the measure is also likely to worry some businesses and consumers who remember when mortgages and interest rates shot up during the country’s 1995 banking crisis.
- The economy could grow a little faster. Improving lending rates should help the economy expand by 1 percentage point more a year, according to Jose Perez, of Standard & Poors. President Enrique Peña Nieto says the reforms as whole should help Mexico grow as much as 6% a year within the next five years, up from 3.9% in 2012.
- More lending will encourage more businesses to leave the informal sector, which now employs an estimated 60% of Mexico’s workers. A number of these small retail operations interested in growing into real storefronts have been stymied by an inability to get funding. Making the formal sector more accessible would ultimately bring in more tax revenue.