Mexico Bank Reform Eases Legal Hurdles To Boost Credit

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Mexico's government wants to boost lending by making it easier for banks to collect on guarantees for bad loans and by giving new powers to regulators to punish firms that do not lend enough, according to a draft of a new banking reform.

Enrique Pena Nieto

* Banks could face penalties for not lending enough

* Aims to lift growth in region's second biggest economy

* Part of pact agreed by major parties

Mexico's government wants to boost lending by making it easier for banks to collect on guarantees for bad loans and by giving new powers to regulators to punish firms that do not lend enough, according to a draft of a new banking reform.

The proposal, a copy of which was seen by Reuters, is due to be announced next week, and is part of a raft of measures designed to ramp up growth in Latin America's second biggest economy.

Thrashed out within a pact made between President Enrique Pena Nieto and the leaders of the main opposition parties, the banking reform targets Mexico's conservative banks, which boast high capital levels but lend much less than their foreign peers.

"Granting more loans, under more favorable conditions in terms of interest rates, duration and amounts, is a crucial element to efficiently allocating financial resources to boost national economic growth," the draft says.

To create more legal certainty, it aims to ease the process for banks to take possession of a loan guarantor's assets in case of default and would streamline the bankruptcy process, which can drag on in Mexico, in part by creating new courts.

Banks would also be subject to periodic lending reviews under the plan, which must be passed by both houses of Congress.

In the reform, the banking regulator would get new powers to punish those lenders that fail to channel enough resources into credit - even limiting banks' securities trading on their own account if lending falls below the required levels.

The finance ministry hopes those measures, combined with a revamp of the development bank, will reduce risk and induce banks to lend more and more cheaply, especially to small businesses.

REFORM DRIVE

Since taking office in December, Pena Nieto has passed a major education reform, and lawmakers in his Institutional Revolutionary Party say a sweeping bill to increase competition in the telecommunications sector should be approved this month.

Wary after Mexico's 1994-1995 financial crisis, domestic private sector financing stands at just 26 percent of gross domestic product and private sector credit at 45 percent of bank assets, below Brazil, Argentina, Uruguay, Peru, and Chile.

Borrowers in Mexico complain of high interest fees, with median credit card interest rates around 29 percent annually, according data from the Mexican central bank.

Small and medium size companies bear the brunt of the credit trickle, generating nearly three quarters of Mexican jobs, but receiving just 15 percent of credit, the finance ministry says.

The reform aims to push the government's six development banks to boost lending to the sector, by bolstering autonomy, promoting long-term lending, and offering competitive pay.

For example, restrictions on granting medium-term loans and on the number of short-term loans, plus rules against making multiple loans to one borrower would be lifted for the development bank serving the armed forces.

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