| | |  Business News | March 2009 
Mexico Rebels at Credit Card Rates, Mulls Limits
 Mark Stevenson - Associated Press
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Mexico City – Millions of first-time credit card holders remade Mexico in recent years, buying everything from diapers to DVD players on credit and spurring a boom in consumer spending and bank profits.
Many now regret it: With interest rates, commissions and fees topping 100 percent a year, delinquencies have soared as the global economic crisis boosts unemployment and leads banks to raise rates even more.
"There's no way out," said Manuel Correa, a Mexico City messenger who saw his minimum monthly payments quadruple to 1,500 pesos, or $105, when he missed a few after losing his previous job. That amount is a third of his income.
"I'd have to choose between eating, paying the rent or paying the bank," he said. He chose to eat.
Congressmen, grass roots activists, one of the world's richest men and even the Roman Catholic Church are now rebelling against the rates, some of the world's highest and equal to 10 times the top rate banks pay out on deposits.
"Banks are acting with irresponsible voracity, demanding extremely high interest rates which in the end, people won't be able to pay," the Catholic Archdiocese of Mexico said in December. Banks' "insatiable greed" is speeding an economic crisis that may spark social unrest, the Church warned.
So great is the anger that Mexico's conservative governing party has argued in favor of following in the footsteps of leftist Venezuela, which caps credit card interest rates at 33 percent.
A bill now before the Senate would allow the central bank to limit bank fees and slash interest rates that regulators consider excessive, and to boost transparency by requiring banks to report more detailed information on the rates they charge. A Senate committee on Wednesday removed language that would have capped rates.
Among the unlikely suspects supporting rate reductions is Mexican billionaire Carlos Slim, who in December called credit card interest rates "unsustainable, and in the majority of cases, unpayable."
Slim's own bank, Inbursa, offers a card for preferred customers that charges 47.7 percent, one of the lower rates around. But the bank is not a big player in the domestic credit card market and critics dismissed Slim's statements as carping against bigger competitors.
Critics of the bill's measures warn they will hit the poor hardest, shaving bank margins and making them less likely to lend to anyone with a less than excellent credit history.
"If we set rate ceilings, we are going to leave out a good number of Mexicans, especially poorer people, without access to credit," said Enrique Castillo, head of the Association of Mexican Banks.
Banks admit that part of the problem was explosive growth in bank and store credit card accounts. Credit had collapsed in the wake of Mexico's 1994 peso crisis, making it hard to get a card through the end of the decade.
Foreign institutions such as Citigroup Inc. and HSBC Holdings PLC saw an opening, buying local banks and boosting credit card business 14-fold to a peak 280 billion pesos, or $26 billion, in outstanding loans in February 2008. The number of credit cards doubled to more than 42 million between 2004 and 2007.
Warning signs soon appeared, with 9.5 percent of card holders falling behind on their payments this February — higher than the 8 percent delinquency rate predicted for the U.S. this year.
Many Mexican card holders had little experience with credit. They overspent, maxing out as many cards as they were offered, rather than managing their debt in order to seek the lowest rate, said Castillo.
"Banking promoters gave credit to people who simply didn't have the capacity to repay," said debtor activist Alfonso Ramirez Cuellar.
What's more, Mexico's largely inexperienced consumers seldom shop between banks, accepting high rates rather than driving competition that would force interest down, said Marco Antonio Carrera, head of market studies for the Bank Customers Defense Commission, a regulatory agency that fields financial services complaints.
As a result, Mexico's two largest banks, Bancomer, owned by Spain's BBVA, and Banamex, a subsidiary of Citigroup, together control 57 percent of the credit card market. In the U.S., four banks compete for a similar share.
While rates range from about 28 percent to 113 percent a year, the Association of Mexican Banks insists the average is about 37 percent. But even that is three times the median U.S. credit card rate of 12.1 percent last year.
Banks argue that antiquated Mexican regulations make it hard to seize a debtor's assets to recover past-due loans, driving up risk. The process usually requires a trial, which can take years — in effect encouraging banks to charge higher interest because they have few other ways to cover losses.
The current economic crisis has meanwhile pushed banks to renegotiate balances and offer lower rates to reliable customers. Bancomer charges as little as 28 percent for clients who pay their debts on time for a year, and Banamex says it has helped 130,000 people restructure their credit card debts.
Banks have also scaled back promotions, removing credit card sign-up stands from shopping malls and supermarket check-out counters.
But looming in the back of Mexicans' minds is the $70 billion that taxpayers paid to bail out banks in the 1995 crisis, and the possibility that high interest rates and debtor defaults could make that happen again.
"There are a lot of people who have to use their credit cards to buy food" because of the current economic crisis, said Congressman Antonio Soto, who wants rates capped. "They are not going to be able to pay ... and the cost will once again be borne by the taxpayers." |
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