Mexico’s Regulatory and Supervisory Authority Supports Financial Cooperatives (CFIs) - by Luis José Arredondo

A blog by Luis José Arredondo Heredia, Director General of Supervision of Savings and Loan Cooperatives, Comisión Nacional Bancaria y de Valores (CNBV, National Banking and Securities Commission)

COVID-19 is a global health and humanitarian crisis that has led to financial crises in many countries, impacting the poor, vulnerable segments of the population, and small businesses. As supervisors and regulators, we place a high priority on maintaining the stability of all financial intermediaries. Given this focus, we coordinate the measures adopted for Cooperative Financial Institutions (CFIs) and Banks, similarly designing them, given that they face comparable types of risk.

Additionally, We are applying other priorities to supervise and regulate financial cooperatives.

 

Priority 1.

Monitor the risk and vulnerabilities resulting from COVID-19, which can affect the resilience of poor individuals and enterprises, and may warrant a supervisory and political response.

Priority 2.

Assess the impact of the measures on liquidity, and capital adequacy levels.

Priority 3.

Contribute to intersectoral financial policy initiatives, mainly those related to development banks, because these intermediaries provide credit guarantees to the sector, thereby reducing their exposure to credit risk.

Key recent CNBV measures in response to Covid-19

Mexico’s Comisión Nacional Bancaria y de Valores recently launched a special accounting standard that allows CFIs to support individuals and micro, small and medium enterprises (MSMEs) whose incomes have been affected by the COVID-19 crisis. Launched in April 2020[1], the move responds to a request for authorization from CFIs.

The objective was to create a mechanism that would allow individuals and MSMEs to have more liquidity, freeing them from the payments required to be made to CFIs in the period of confinement, and at the same time obtaining discounts, waiting periods, as well as agreed payment schemes, due that the contingency by COVID-19 caused the closure of a large number of economic activities.

The abrupt closure of many economic activities considered non-essential[2], which were suspended since Mar 30th 2020, has generated uncertainties regarding the financial viability of a large number of companies that have seen their operations affected, which could, in turn, affect their ability to pay. It should be noted that 64% of the business portfolio of financial intermediaries in Mexico is linked to non-essential activities. Meanwhile, Mexico’s industrial production dropped by almost 30 percent, by the end of April 2020, the biggest drop in the history of the indicator, thus adding to the bleak economic picture faced by financial institutions.

CFIs in Mexico must classify loans that were restructured in the past when it comes to operations with periodic payments that report arrears for 90 days or more. The accounting standard applies to loans classified as a current portfolio, which in the case of CFIs, corresponds to operations in the current portfolio as of Mar 31st 2020.

Regarding this measure, a special term of 120 days was granted, to restructure operations of individuals and MSMEs that request support, allowing the CFIs not to classify these operations in the past-due portfolio. It should be noted that the measure is transitory, only applicable to a defined period, and the CNBV does not plan to grant an extension. Temporary regulatory easing may be appropriate to improve the current situation, but the restoration of standards should be planned once the activity has normalized so that a combination of vulnerabilities and looser regulation does not cause future crises.

Through other standards under analysis, an effort will be made to encourage CFIs to redirect credit to individuals and MSMEs through risk-sharing measures, such as public credit guarantees.

Principal benefits of the recent CNBV decisions for CFIs  

• They provide the opportunity to design refinancing solutions for individuals and MSMEs that report late payments after March 2020.
• Past-due portfolio indicators are not abruptly affected.
• The modifications to the mortgage-backed loans, which cannot be updated before a legal notary due to Covid-19 restrictions, will continue to be considered as guarantees for the Loan Impairment Charges, provided they are documented by a contract signed between the parties.
• The reduction in the cost associated with the Loan Impairment Charges consequently has less impact on their capital adequacy.
• They offer them the possibility of requesting information that allows analyzing the payment capacity and cash flows of borrowers, under current economic conditions.

Disadvantages or costs charged to CFIs:

• They must make changes to their accounting and operating systems.
• They must meet a high level of requests with fewer people, due to confinement.
• They must generate information to incorporate disclosure notes in their financial statements, and provide monthly reports to the CNBV.

Principal benefits for individuals and MSMEs that request support from CFIs

• The payment history kept by borrowers at the credit agency will not be affected by their non-payment.
• It provides the opportunity to extend the payment term by six months or eighteen months if it is for loans whose payment source corresponds to the agriculture, livestock, forestry, fishing, industrial, commercial, and service sectors. Loans intended to finance any other economic activity, which is carried out in cities with a population of up to 50,000 inhabitants, are included as part of these sectors.
• No contractual modifications should be made that could be considered explicitly or implicitly the capitalization of interests.
• The financial restructuring process will not generate cost or commission.
• In the case of revolving lines of credit, the amounts previously authorized must not be restricted or decreased by more than fifty percent of the unused portion.
• No additional guarantees or their replacement will be requested.

 

Selected statistics and results

Between April and June 2020, the trend of savings deposits in Mexican CFIs reports an increase of USD 186 million. This is explained, in our view, by the behavior adopted by individuals and enterprises that have reduced their consumption, they prefer to save money to face a potentially worsening crisis in the medium and long term. It highlights a significant contribution from remittances from the United States, We expected a decrease in remittances in the short term, but they showed the opposite behavior apparently because Mexicans working in the United States are employed in essential activities, such as in agriculture.

In the same period, Mexican CFIs reported a contraction in credit activity, and a recovery in the credit portfolio by USD 100 million, even though individuals and enterprises could face impacts in their payment ability in the medium and long term. As a result, the indicator, that measures the liquidity in the sector, went from 41 percent to 45 percent in that period.

Under CNBV’s special accounting standard, CFIs have restructured 379 thousand loans belonging to individuals and MSMEs (about 10 percent of the total number of restructured loans in the financial system) worth USD 760 millon (about 8 percent of the total amount), as of June 26th, 2020.

The financial cooperatives will be relevant to recover the dynamism of economic activity, because this sector provides financial services to economically disadvantaged individuals and MSMEs, and help them to transit from the informal to the formal economy. Moreover, the CFI sector is highly relevant for the fulfillment of the financial inclusion objectives defined in Mexico, which focus on increasing financial services, with an emphasis on gender equity, and oriented to green finance.