Mexico City, Mexico - Mexico's government proposed a sweeping overhaul of the banking sector last Wednesday to make credit cheaper and more available, a move desperately needed in a country where bank loans represent less than 20 percent of GDP — one-tenth the level seen in the United States.

The plan would encourage banks to compete and lend more, create incentives for mid-size companies to list shares on the stock market, and modify bankruptcy laws to make it easier for lenders to seize debtors' assets.

Critics warned it could launch a wave of foreclosures like those seen in Spain and the United States, while supporters said it is needed to spur banks to lend to Mexico's credit-starved businesses.

The plan has been submitted to Congress, where the country's three major parties are supporting it.

The proposal is intended to pull Mexico out of the long shadow of its 1995 financial crisis, which threw the country's banks into near-bankruptcy, forcing authorities to rescue them and later sell most of the biggest banks to big foreign financial groups.

Lawmakers presenting the plan criticized the foreign banks, like BBVA, Citigroup, and HSBC, saying they have made few loans to businesses, concentrating their loans instead on high-interest credit cards and money market investments.

"We don't have a real banking system," said Jesus Zambrano, whose leftist Democratic Revolution Party supports the reforms. "We have a system of bank usury, that doesn't take risks, that doesn't bet on development."

While banks have largely expanded credit and debit-card use, sometimes charging annual interest rates of 70 percent or more, they have largely ignored the small and medium-size business that provide the bulk of Mexico's jobs. With five big banks dominating more than 90 percent of the credit market, the sector also lacks healthy competition.

"When the banking sector was opened to foreign firms, they thought it would increase competition, but they didn't compete," said economic analyst Rogelio Ramirez. "What we need is a reform to have them compete more, and make the market more attractive, but the banks are happy to just issue credit cards."

Mexico's President Pena Nieto embraces Democratic Revolution Party President Jesus Zambrano

"The key challenge today is for regulators to break the perverse equilibrium in which the balance is inclined against loans to businesses and toward consumer lending," Ramirez said.

The proposal would require regulators to carry out an anti-monopoly investigation of the banking sector, and would make future operating permits dependent in part on how much the banks lend and to whom.

According to the World Bank, loans to the private sector were only 18.7 percent of Mexico's gross domestic product, compared to 202 percent of GDP in the United States. Even many of the poorer, smaller countries of Central America have a higher percentage of loans, such as Guatemala's 23.4 percent and El Salvador's 41 percent.

That translates into a lack of growth for businesses that can't expand because they can't get loans.

"The object is ... for banks to lend more, and more cheaply," said President Enrique Pena Nieto. "Credit is a key input for growth in any economy."

The Mexican Bankers Association said in a statement that it agreed with the goals of the proposal as long as changes carried out "through market measures," but said it would study the specifics of the plan.

Jonathan Heath, an independent Mexico City-based economist, said few banks in Mexican have been willing to lend to small businesses that often fold within a couple of years, because the country's laws make it difficult to seize collateral pledges or assets put up in return for loans.

"How do you lend to a company and have the guarantee they're going to pay you back? No financial system is going to work if you don't have clear property rights," Heath said. "Why would a bank prefer to lend money with a much higher risk rate, when it can just buy the government bonds and just live comfortably off that."

The overhaul would change Mexico's antiquated and length bankruptcy proceedings, and ease the way for banks to seize debtors' assets. That has raised fears in a country where millions of people faced the prospect of losing their homes in the 1995 crisis, when interest rates on their mortgages suddenly shot up to 100 percent.

That spurred big demonstrations against foreclosures in Mexico like those currently seen in Spain, following the bursting of that country's housing bubble.

Alfonso Ramirez Cuellar of the El Barzon debtors' advocacy group said he feared the proposed changes could spur a Spanish-style wave of foreclosures.

"We could find ourselves in an accelerated foreclosure situation as serious as that which occurred in Spain or in other countries, like the United States ... the kind of crisis that is caused by accelerated trials where the process of seizing assets is just too rapid," Ramirez Cuellar said.