The Financial System and Access to Credit in Mexico

Micro and SME

March 2013

Index

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13

Number of clients by Enterprise size*Clients

• Banks pay now more attention to Micro Enterprises.

• From July 2009, the number of Micro clients increased by 36.4%.

Credit Growth, Micro Enterprises

*/ Size of the Enterprise defined by number of employees and annual income.

Large

Medium

Small

Micro

Credit amount by Enterprise size*

Large

Medium

Small

Micro

The amount granted to Micro Enterprises has doubled from July 2009 to January 2013.

• Greater number of clients

• Greater amount granted

mmdp

-

25

50

75

100

125

150

175

200

jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13

*/ Size of the Enterprise defined by number of employees and annual income.

Credit Growth, Micro Enterprises

-

200

400

600

800

1,000

1,200

1,400

jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13

Amounts of Credit by Enterprise Size*mmdp

SME

Large

• In July 2009, the segment of SME´s represented 48% of the amount of Commercial Loans.

• In January 2013, the segment of SME´S represents 51.1%.

• This means that smaller

companies have increased their access to banking credit.

Credit Growth, SME´s

*/ Size of the Enterprise defined by number of employees and annual income.

SME Credits up to 100 mdpLarge Credits larger than 100 mdp

Interest Rate by Enterprise Size%

The interest rates charged to Commercial Loans have decreased in all segments. However, interest rates charged to Micro Enterprises are volatile. It is considered that size is proportional to credit risk, and therefore interest rates charged to smaller enterprises are higher, even by 300 bp.

Micro Small Medium Large

13.47

10.5210.48

9.51

8.269.10

7.15

4

6

8

10

12

14

16

jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13

%

Interest Rate by Enterprise SizeVs. Banking Funding Rate (TIIE)

8.58

5.685.60

4.67

3.424.22

2.312

4

6

8

10

jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13

Credit Growth, Interest Rates

The CNBV performed two surveys and economical studies:

• Survey to Micro and SME´S: the objective was to identify the sources and conditions of access to credit, use of the resources and factors for productivity.

• Survey to Banks: the objective was to study the credit allocation strategies to Micro and SME´s, and analyze some factors that incentive or refrain credit.

Empiric Evidence

National Survey of Competition, Credit Sources and the use of Financial Services by Enterprises (ENAFIN).

• The objective of the Survey was to identify the reasons that slow down or refrain credit to enterprises in banks.

• ENAFIN is a survey to no financial enterprises, with more than five employees, established in locations with 50,000 inhabitants or more. The sample contains 986 enterprises. The results are representative at a national level, by enterprise size.

• Performed by the Interamerican Development Bank and the CNBV in 2009.

Micro and SME´s Survey

• Six out of 10 enterprises are family businesses, 8 are owned by a man and 9 are registered to pay taxes.

• The most used source is Suppliers, (55%). Credit from financial intermediaries represent the third source of finance for enterprises (43%).

• The destination of the credit in most cases is working capital.• Revolving credit is the most used product.

Suppliers Internal Resources Financial Intermediaries Family and friends

55%49%

43%

15%

Most common sources of Financing, % of Enterprises

Revolving Credit Credit Card Short term credit Long term credit

25%

20%

15%13%

Most common type of credit, % of Enterprises

Micro and SME´s Survey

Most enterprises do not give guarantee for the credit, only 3 out of 10 do.

Should the enterprise provide guarantee, they would pay a lower interest rate.

71%

29%

Revolving credit granted during2005-2009

Enterprises without guaranteeEnterprises with guarantee

With Guarantee Without Guarrantee

68%55%

32%45%

Revolving credit granted during2005-2009

Enterprises that paid interes rate of 10% or lessEnterprises that paid interes rate of 10% or more

Micro and SME´s Survey

Lower interest rates are associated with lower risk. Risk indicators: lack of payment, guarantee in the credit.

Micro Small Medium Large0%

10%

20%

30%

40%

50%

60%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

28%24% 21%

12%

32%24% 37%

49%

19%

13%12%

11%

Annual Interest Rate for Revolving Credit and Risk Indicators(as% of Enterprises using this type of Credit)

Enterprises behing payments Enterprises that give guarantee Interest rate paid

Micro and SME´s Survey

*/ Size of the Enterprise defined by number of employees and annual income.

Only two out of ten enterprises ask for a long term traditional credit during 2005-2009, and only one out of ten obtained it.

This trend is also true for larger enterprises.

80%

10%10%

Long Term credit

Did not ask Asked, rejectedAsked, accepted

Micro Small Medium Large

84% 78% 73% 75%

9%11%

11% 10%

8% 11% 16% 15%

Did not ask Asked, rejected Asked, accepted

Long Term Credit

Micro and SME´s Survey

*/ Size of the Enterprise defined by number of employees and annual income.

Performed by CNBV and CEPAL (Comisión Económica para América Latina y el Caribe) in 2011.

• The objective of the survey was to analyze the target market of the banks, their business model and to find those factors limiting the offer of credit.

• The sample contained 15 banks, which participate in the “SME Committee” of the Banks Association. These banks have 97% of the portfolio of credit for enterprises of 25 million pesos or less.

• Additionally, personnel of Nacional Financiera were interviewed, to complement the information obtained about guarantees of credits to micro and SME´s and the market function.

14

Banks Survey

• Large Banks: Attract as many clients as possible, through their branchs net or specialized executives.

• Banks with an interest in Micro and SME´s: Niche or regional banks use “relationship lending” to attract clients.

• Banks with no interest in Micro and SME´s: Banks that offer credit to Micro and SME´s only to serve their current clients.

Three identified business plans:

15

Banks Survey, business model

• Banks confirmed their interest to offer and compete for “complete solutions” for Micro and SME´s, with packages that include credit, deposits and means of payment. As much as 73% of interviewed banks offer more than 5 different products to their clients.

• As much as 73% of interviewed banks have a specialized area to Micro and SME´s and a specialized strategy for the sector.– The functions of planning of targets and products, potential clients, origination and follow

up of credit, collection in the first 30 days, are concentrated in this specialized area.– Banks usually have a specialized sales force inside the branches

• As much as 83% of interviewed banks offer specialized and extensive (more than 80 hours a year) training for this areas.

• Turn over of high level executives is 7 years. Average turn over for medium level executives is 4 years. In lower levels the turn over is 2 years.

Análisis propio con base en entrevistas con los Bancos.16

Banks Survey, Target Market

17

Banks Survey, Potential limitations for credit

Index

SOFOMES

• “Multiple Object Financial Societies” (SOFOMES) is a new specialized vehicle for lending purposes.

• They were intended to represent more competition for banks, diversifying the credit offer.

• They are only regulated and supervised by CNBV in case the SOFOM is related to a bank.

• SOFOMES were conceived as entities which have to compete for funding in the markets and, based on well informed participants, only those which effectively create value and perform better that the rest would prevail.

• The most succesful SOFOMES are looking to transform to a niche bank or to another regulated financial entity.

SOFOMES lead to additional failures that affect the whole SME’s credit market, such as:

• Do not report credit performance to the credit bureau;• Do not have clear incentives to adopt sound prudential practices.

To complete credit records and enhance the credit score as an effective decision tool, SOFOMES should be forced to timely report credit performance from their borrowers to the credit bureau.

On the other hand, there is not clear evidence (yet) that the cost of lending to SME’s decreased because of competition, since SOFOMES were created.

SOFOMES

Transparency as a way to efficiency

• In 2007 the Law of Transparency and Ordering of Financial Services (LTOSF) was issued.

• Users of those services should compare net interest rates and contracts, between similar credit products offered by banks and other entities.

• SOFOMES and non financial entities which are professional lenders are subject of this Law.

• Despite Mexican financial authorities actively promote transparency and competition, people are not used yet to compare before acquiring the service.

SME’s credit market

Banks have to face the following challenges regarding SME financing:

• Lack of timely financial reporting;

• Inaccurate information to build expected loss credit ratings and pricing models;

• Other credit activities could be more profitable of efficient in use of capital;

• SME’s are adverse to demand credit.

• Collecting the collaterals could be difficult in the short term.

Index

• Six out of ten enterprises finance from suppliers, five with internal resources, four with financial intermediaries and two with friends or family

• The smaller the enterprise, the bigger the chance to not have a

traditional credit.

• In the last five years, only two out of ten enterprises ask for a long term traditional credit and only one out of ten obtained it.

• The smaller the credit risk, the smaller the credit rate.

• Seven out of ten enterprises do not give any type or guarantee for their credit.

• When they do give a guarantee they obtain smaller interest rates.

• The smallest enterprises are more likely to be behind in their payments and pay larger interest rates

Conclusions

• The principal obstacles to offer finance to micro and SME´s are:– Lack of legal protection for lenders: legal system is complex, slow

and expensive.– Macroeconomic Factors: strong impact during crisis.– Cultural and regulatory factors: informality is the most important

identified problem.

• Banks face the largest problems to serve new enterprises (less than 2 years), informal and micro enterprises, as well as entrepreneurs.

– This type of enterprises face obstacles derived from information asymmetries, transaction costs and lack of guarantees.

• No evidence found that the origin of capital (national vs. foreign) or historical factors of the banks would obstacle the credit allocation.

• Depending on the business model, banks seek to offer greater quantity of services to their clients.

Conclusions

• Capital cost for SOFOMES is lower than for banks, giving them a competitive advantage.

• In some cases they face difficulties to funding and therefore their growth is limited and subject to the economic cycle.

• There is no evidence that they represent a real competition for banks, making the interest rates to decrease.

• The fact that SOFOMES do not report to the credit bureau limits financial inclusion.

• It is not clear that a regulatory burden would help them to have better practices.

Conclusions

Credit to Micro and SME´s in Mexico is growing and in the right path, but

there is still work to do.

Conclusions