MEXICO CITY-Latin American banks are experiencing a sharp rise
in "payroll loans" that are repaid through deductions from workers'
paychecks. These often small and relatively low-risk loans help
banks decide whether they want to deepen their relationship with a
borrower in the credit equivalent of a coffee date.
While little used in the U.S., payroll loans have spread from
Mexico to Brazil. Banks give credit and then get repaid through an
automatic deduction of the person's paycheck every two weeks,
increasing the likelihood of repayment. The loans' newfound
popularity--driven by pre-approved offers at ATMs and, in some
cases, competitive interest rates--could help the region's
expanding middle classes gain access to funds. But they also could
turn off consumers from credit or, some fear, trigger widespread
defaults in other types of debt.
Payroll loans in Brazil increased 16.5% in the 12 months through
September to some $88 billion, according to central bank data. That
is equivalent to 60% of all personal credit in the region's largest
economy.
In Mexico, these loans jumped 32% in the same period to more
than $9 billion, or double the rate of credit-card growth. Three of
Mexico's largest banks say that one in five of their payroll
customers has taken out such a loan.
Last month, Brazil's biggest bank, Itau Unibanco Holding SA
(ITUB, ITUB3.BR, ITUB4.BR), joined with Banco BMG SA, a midsize
bank, to cash in on the payroll loan market. The joint-venture aims
to lend some $14 billion in payroll loans over the next four years,
bank officials said.
Latin American banks for years have been looking for ways to get
credit to traditionally underserved customers. Payroll loans in
particular have lower default rates than credit cards and can serve
as an easy introduction to credit. In theory, the loans should
carry a smaller interest rate than credit-card debt, since their
repayment is linked to paychecks.
In Brazil, the interest rate on payroll loans is around 20%
versus 40% for other types of consumer credit. In Mexico, annual
interest rates are similar to the 35% charged on much credit-card
debt, even though the default rate on payroll loans is lower than
on credit-card debt: about 3% versus 5%.
Some Mexican banks burned by a 2008 jump in consumer defaults on
credit-card balances view the payroll loans, known colloquially as
"credi-nomina," as surer bets for repayment in a country where
financial education is limited and consumers have a spotty record
of loan repayment.
In Mexico, the region's second-largest economy, there is one
credit card for about every three adults over the age of 20,
compared with more than five cards for every adult in the U.S.,
according to government statistics from both countries.
Javier Arrigunaga, chief executive of Citigroup Inc.'s (C)
Banamex unit, Mexico's second-biggest bank, said information on
payroll clients, such as incomes and withdrawals, allows Banamex to
bestow a "much healthier" credit than for unknowns.
Yet the loans also have the potential to burn credit newcomers.
Felix Escobar, a 40-year-old sales representative at a beverage
company in the state of Mexico, borrowed around $2500 from Banamex
five years ago when his father fell ill. Mr. Escobar thought the
payroll loan was paid off when he switched to another employer that
used a competing bank for payroll. Then, a year ago, he changed
jobs again, joining another company that uses Banamex for its
payroll. Suddenly, Banamex deducted the equivalent of more than
$600 from his account, saying that Mr. Escobar had missed a payment
several years ago, and that with accumulated interest, the bank was
entitled to an amount equal to 24% of the original loan.
Mr. Escobar, who doesn't own a credit card, said the experience
served as a "bad lesson" in credit and that payroll loans should be
an option of last resort.
A Banamex spokesperson said the bank has the power and legal
right, based on its credit contracts with clients, to pull late
payments directly from client accounts. Delinquent payments accrue
interest, the spokesperson said, and can lead to bad marks for
consumer-credit records.
Critics also say that Mexican banks are giving out the credit
too liberally in a country with pent-up demand for loans.
"It appears very easy to take this credit," said Marco Carrera,
director of market studies for Condusef, the consumer-finance
protection arm of Mexico's Finance Ministry.
Regulators at Mexico's Securities and Banking Commission
discovered in 2012 that several banks had given payroll loans to
customers who were already overextended with other credit, like car
loans.
The agency threatened to impose higher reserve requirements if
the banks didn't correct their lending practices.
"If we don't demand discipline at the banks, we have seen that
time and again, both in Mexico and abroad, it's very common for
banks to commit excesses so as to win market share and run a
business based more on short-term gains," says Guillermo Babatz,
who stepped down in December as Mexico's top banking regulator.
Mexican bankers say their internal safeguards prevent customers
from overextending themselves on payroll loans.
"[We aren't] wandering the streets asking people on every corner
if they want credit," Grupo Financiero Santander Mexico SAB (BSMX,
SANMEX.MX) Chief Executive Marcos Martínez said.
Mexican banks generally try to refrain from lending to customers
who already are allocating 40% of their salaries to debt payments,
the regulator says.
Moody's Investors Service last month called the rapid expansion
in Mexican payroll loans "worrisome," comparing the buildup to the
banks' 2008 missteps with credit cards. But Arturo Sanchez, a
Standard & Poor's bank analyst, believes Mexican banks are
starting to exercise greater caution before granting the loans.
"Overall, going forward, we don't see this product as bringing a
systemic risk to the financial system," Mr. Sanchez said.
--Luciana Magalhaes and Rogerio Jelmayer contributed to this
article.
Write to Amy Guthrie at amyguthrie@wsj.com
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