BY GARRETT NASWORTHY · THE NEWS
Mexico's banking industry is facing the toughest financial and economic crisis in decades, and it is already making adjustments to credit access, interest rates and everyday banking practices. But some of these adjustments, particularly to credit card rates, have been subject to public outcry, and Congress has entered the fray with talk of greater regulation.
But Marcos Martínez Gavica, director general of Grupo Financiero Santander's Mexico operations and former president of the Mexican Bank Association, says banks and their customers can handle the situation themselves. More regulation, he says, would only make things worse.
How has Santander been affected by the crisis?
We have seen minimal affects in our Mexican operations. However, several important elements have arisen that we see affecting us down the road. The real negative factor for us is a serious decrease in financial activity on several fronts, but especially in demand for credit and in savings contributions.
Customers are flat out losing money and their ability to save. At Santander, before the crisis hit, savings funds were growing at a 13 percent annual clip. Growth is now almost half that, at 8 percent. Business demand for credit has plummeted along with the crisis with our annual growth rate in business credit looking to fall 10 percentage points, with PyMEs looking to receive half as much credit in 2009 as predicted before the crisis.
What strategies can banks pursue in Mexico to confront the crisis?
Banks have started to realize the reality that they need to start tightening the criteria set for giving out credit. The real adjustment that banks are going to have to make is to "shrink the universe" of clients that are eligible to receive credit, with tighter restrictions, as a way of protecting ourselves. In addition in this new "universe," we need to be able to pinpoint the high risk customers faster.
In addition to certain "in need" sectors, such as the small business clients, banks will need to be more flexible. If a small business is having trouble paying off its current credit payments because of high interest rates, both the banks and the businesses should look at adjusting the prices and structures of loans before terminating relationships.
What are the most serious problems in the Mexican financial sector? What role do both the banks and their customers have in fixing them?
The level of credit card default is by far the biggest sign of weakness in the Mexican market. Clients are starting to see a level of financial hardship not seen for several years, and both the banks and their customers are going to need to work together to fix this specific problem.
From a banker's perspective there is an additional problem. A large segment of credit card users, who paid their cards regularly before and still have the ability to make payments have started to default consciously on payments. For this stalemate to end, there needs to be a clear signal sent by the banks that they will be more flexible with rates, and maybe take a loss along with a client's falling income. But it needs to be made very clear to the clients also that it is mandatory to pay their credit cards, and that if they do not there will be consequences.
Is it justifiable to raise interest rates in reaction to higher default rates?
The cost for credit cards and credit in general has risen for the typical banking client in Mexico. It has risen along with a higher inherent risk in the environment that costs banks more. For this reason it has become a necessary measure for banks to raise lending costs in the face of higher credit default, to cover their costs.
However in the case of our bank in particular, we aim to be more flexible, offering certain low-interest rate cards and extending a helping hand to our customers in their time of crisis. There is always a limit to using higher interest rates. You must act on a client-to-client basis. If a client has a higher risk then certain measures must be taken.
What do you think about the debate in Congress over the regulation of credit card interest rates?
This a good opportunity for Congress to try and get a clearer outlook on the day-to-day realities of how credit is flowing during the crisis. However, there are some legislators who are [using] the debate as an opportunist measure, which is not good. In regard to the greater outside regulation of credit card rates proposed in this legislation, there stands to be a lot of damage to the financial system. Any new regulation may also forcibly obstruct the free flow of credit in many of Mexico's financial institutions. The consequences would be more negative than positive.