Paúl Alejandro de la Cruz Frías
Assistant Director of Transparency and Financial Inclusion
Banco de México
View from the Top

Promoting a Healthy Financing Competition

Tue, 09/01/2015 - 16:22

Q: How has the country’s economic situation evolved since the 2008 crisis and what part has Banco de México played in the success of the automotive industry?

A: As Mexico’s central bank, Banco de México does not regulate the automotive industry, although it does have some influence in certain activities. The central bank helps to safeguard the economy by maintaining price stability, promoting the sound development of the financial system, and fostering functional payment systems. Our monetary policy rests on four pillars. The first one is the central bank’s full autonomy from the government. The second one is an inflation goal scheme, based on a systematic assessment of the determinants of prices. Our third pillar is the search for an efficient convergence toward our inflation target at the lowest possible cost in terms of economic activity, while the fourth is a strict commitment to transparency and accountability. Mexico, similarly to other growing economies, has recovered from the last global financial crisis. However, in recent years there has been a deceleration in growth. The prosperity phase characterized by high prices in raw materials, low interest rates, and a considerable liquidity in international financial markets is now reverting to previously low growth rates, so it is crucial to migrate to productive activities in the secondary and tertiary segments where the automotive industry offers considerable potential to the country.

Mexico has a strong macroeconomic position with a consistent fiscal and monetary policy, a moderate current account deficit, as well as an efficient and flexible exchange rate. Furthermore, the international reserves are close to a historic maximum, and we have a flexible credit line with the International Monetary Fund (IMF) for almost US$70 billion. At the same time, the banking system is well capitalized and the country’s financial regulations and supervision of such has been strengthened.

Q: How is inflation affecting the automotive sector, and what are the major factors that could cause fluctuations in this market?

A: Inflation has remained stable over the past few years. Moreover, the automotive industry has lower inflation rates than other economic sectors. For instance, between June 2014 and June 2015, inflation in vehicle acquisition was 2.55%, lower than most other basic goods with an average of 2.87%, according to figures from INEGI. A risk factor for price stability is possible turbulence in financing markets, leading to drastic changes in general prices and the peso exchange rate. However, the actions taken by Banco de México allow for proper adjustment in an orderly manner.

Q: How have financial services developed in Mexico, and what challenges is the country still facing in this area?

A: Banking and financial services reached 38.7% of the adult population in 2014, growing from 27.4% in 2011, which represents an increase of almost 10 million new account users, some of whom were reached through social programs focused on fighting poverty. Nonetheless, there are still 48 million adults without access to formal financial services. Part of this growth was due to an increased development in financial infrastructure that now includes around 13,000 branches, 43,000 ATMs, and 27,000 banking correspondents, distributed throughout 68% of the municipalities in the country, reaching 97% of the population. Nevertheless, there are still opportunities to expand the banking infrastructure and reach people with low incomes, while promoting financial inclusion in rural and semi-rural areas in terms of mobile banking.

Q: According to Banco de México’s Automotive Financing Basic Indicators, the volume of financing services decreased in 2014. How have these products evolved in 2015?

A: The sector is growing, but sometimes these services are not offered by banking institutions. According to figures from AMDA, from January to May 2015, 312,891 out of 502,935 vehicles were sold through financing, representing 62.2% of the total. This number can be divided in three segments, 65.8% sold by financial institutions, 27.9% through banks, and the 6.3% corresponding to auto financing. The goal of this study is to make credits comparable between different institutions, so we can have a clear idea of how the market is evolving and which institution is offering the most competitive rates. These reports encourage competition and promote mobility among customers. A future strategy is to include financing branches dedicated to automotive companies, and since Banco de México manages and regulates information from all institutions that work with automotive loans, all these companies must include a standardized indicator in their products, such as the total annual cost rate (CAT). Automotive loans are long-term products that could not be offered without the stability provided by Banco de México’s policies.

Q: Does Banco de México have any control over the interest rates that companies outside the banking sector offer to their clients?

A: Banco de México decided not to stipulate a maximum rate for any financial service because restricting interest rates limits market freedom and competition, and therefore damages financial stability. If we set a low interest limit, there might be people that could not access these services given their risk profile. This could also create inefficient competition, forcing companies to set the same rates for their products. Despite other countries using limits, evidence shows that it is not an effective measure. Our strategy has always been focused on transparency, offering all the necessary information to allow companies to compete freely. This was how we introduced our CAT regulation, to force companies to communicate the real costs of their financing products. What we do regulate is commissions charged for financial services. By law, every bank has to send its commission plan to Banco de México, and we determine if it includes appropriate costs. However, we cannot control companies outside the banking network, but when clients personally compare CAT rates they can verify if these companies are charging more.

Q: Has the Mexican public become more knowledgeable about the best financial products on the market?

A: Definitely, but there is a crucial problem in Mexico related to financial inclusion and education, so we have included both of them as key factors of our strategy. For example, people sometimes do not want an account or a loan because they are not aware of the advantages of using these properly, or how to calculate the costs of an interest rate. As the central bank, we have focused part of our efforts on protecting and educating the population on this subject, and we are developing an ambitious strategy to promote financial education and consumer protection. We participate in programs like the Financial Education Week, collaborating with the Interactive Museum of Economy to show people how our financial system operates. Additionally, we are working with the National Banking and Securities Commission and the Ministry of Finance and Public Credit on their financial inclusion and education plan. Given that Banco de México’s objective is to seek purchasing power stability of our currency, promote the sound development of the financial system, and facilitate the correct functioning of payment systems, we have several campaigns to encourage the correct use of banking products and efficient payment solutions. We must create confidence in the financial system, we need to increase accessibility to financial services, and we ought to help companies provide the necessary information to allow consumers to use these products correctly. Finally, we must create an environment that protects customers, and real education in terms of financial services, debt, and interest rates.

Q: What are the reasons behind the increased volatility in interest rates for 2014?

A: This is true only for the most recent products and within a close variation margin. If we look at the global interest rate trend, we can conclude that there is a tendency for stability at 12%. For 2015, we are expecting the same behavior and there is actually a trend to decrease these rates even further. We have information regarding every credit, but until now there has been no major distinction between brands. However, for our next analyses we are planning to divide the information by the size of loan so that we have a clearer idea of which segments are more attractive in terms of financing.

Q: What are Banco de México’s expectations for the automotive industry in the short term?

A: According to surveys conducted by Banco de México, directors in the automotive and other related sectors expect an increase in demand for their products and services over the next 12 months. Furthermore, there is still a possibility for a larger private investment influx. In terms of the domestic demand, many automotive manufacturers will boost their exports thanks to the growth of the US economy and the continued peso depreciation. Additionally, US gas prices are expected to drop, hence promoting sales and vehicle exports. It is important to consider that even though most emerging economies will face challenging economic situations in the near future, this will not be a deterrent for Mexico given its macroeconomic stability.