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Moody's: Mexico's plan to bolster financial system a credit positive for banks

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Moody's: Mexico's plan to bolster financial system a credit positive for banks

The Mexican government's plan to bolster the country's financial system by increasing potential bank borrowers would be credit positive for Mexican lenders if implemented successfully, Moody's said Jan. 15.

The plan includes a new smartphone-based payment platform for people without access to bank accounts, the enhancement of payroll-linked loans and an increase in the number of financial entities that can offer repurchase agreements. The new administration also seeks to group agricultural and rural lending development bank Financiera Nacional de Desarrollo Agropecuario Rural Forestal y Pesquero with other entities with a similar focus in order to provide better service for less-banked rural areas.

"The limited nature of the plan confirms our view that the new administration does not currently intend to introduce radical reforms that disrupt banks' current lending practices, such as lending mandates or interest rate caps," Moody's said. The new president, Andrés Manuel López Obrador, has said that he will not implement radical changes to bank regulations during his first three years, despite his party looking to reduce banking fees. AMLO also said he will maintain autonomy in the central bank and advocate for fiscal responsibility.

In the long term, the introduction of the new payment platform for the unbanked population could potentially encourage greater formalization in the economy, which means more clients for banks, Moody's said.

The rating agency also expects reduced credit costs and interest rates with improved security on payroll-tied loans, which will be done by allowing banks to have a priority claim on borrowers' salaries despite the salary being deposited in another bank.

However, Moody's said these proposals fail to address the weak legal framework preventing repossession and recoveries, which it considers as "the biggest impediment to increasing lending" in the country.

"Although the country's 2013 financial reforms sought to make collateral and guarantee repossession quicker and more efficient by establishing new federal mercantile courts for collateral and guarantee repossessions, there has been little progress in establishing these courts over the past five years," the rating agency noted.