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'sFinance Ministry.
Regulators at Mexico'sSecurities 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 MartÃnez 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.
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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'sFinance Ministry.
Regulators at Mexico'sSecurities 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 MartÃnez 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.
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