Mexico: Calderon’s Party Will Propose Law Lowering Loan Rates

Jan 2009
Mexico city, Mexico, January, 20 2009 - Senators from Mexican President Felipe Calderon’s party will propose legislation to lower interest rates on loans, Senator Gustavo Madero said.

The proposal may set maximum interest rates that banks and other companies can charge consumers, said Madero, who is the senate leader for the National Action Party. The measure will replace or expand upon an initiative introduced in Congress last month that aimed to cap credit card interest rates, Madero said.

“Rates are too high,” Madero said late yesterday in an interview. “We’re going to address the cost of credit not only at banks, but also through commercial companies.”

Some Mexican lenders charge annual interest rates of more than 70 percent, and Nobel Peace Prize winner Muhammad Yunus has criticized the charges at microlender Banco Compartamos SA as exorbitant. Borrowers may have more trouble paying as a worsening economy reduces jobs and remittances from Mexicans living abroad decline.

Senators from Madero’s party, known as PAN, plan to submit the initiative in the congressional session beginning next month.

High interest rates on loans are a necessary part of Banco Compartamos’s business model, said Chief Financial Officer Fernando Alvarez.

“The rates we charge are a function of micro credit cost structure,” Alvarez said. “You can see this in any microfinance institution in Mexico or elsewhere.”

Small Loans

Compartamos makes loans of as little as 900 pesos ($64) to the working poor, and charges an average annual interest of 79 percent. Wal-Mart de Mexico SAB’s banking unit collects between 59 percent and 75 percent in annual interest rates on its credit cards.

A rule requiring lower rates may make small loans unprofitable, Alvarez said. “A cap on interest rates could mean that this small-loan segment loses access” to credit.

Calderon’s party will propose separate legislation that would expand the central bank’s mandate to include promoting economic growth in order to help Mexico weather the U.S. recession, Madero said. The bank’s current mandate is only to control inflation.

Madero said it was “inconsistent” that the central bank raised the benchmark interest rate by 0.75 percentage point last year in a bid to tame inflation while the government implemented countercyclical policies aimed at softening the impact of the global financial crisis. Lower interest rates can bolster economic growth by encouraging businesses to take out loans and consumers to spend more on credit.

Rates, Economy

“They’re two policies going in different directions,” Madero said. “Maintaining high rates doesn’t help boost the economy.”

Mexico’s central bank raised the key lending rate to 8.25 percent last year, then lowered the rate to 7.75 percent last week. Madero called the bank’s recent policy “sensible but too conservative.”

Mexican billionaire Carlos Slim, who Forbes said last year was the world’s second-richest man, this month urged the central bank’s mandate be changed to match that of the U.S. Federal Reserve.

The economy will contract in the first half of this year as scarce credit in international markets hurts investment and lower remittances from Mexicans living abroad damps consumption, Finance Minister Agustin Carstens said Jan. 9. The economy contracted last quarter, Central Bank Governor Guillermo Ortiz said the same day.

Source : Bloomberg

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