Lime Mexico Managing Director Maxim Ivanov talks on the peculiarities of the Mexican microfinancial market as well as its cultural background and the underlying mechanisms.
Let’s start by talking about clients. Generally, who are Lime MX typical customers? Is it true that business loans are heavily developed in Mexico?
Up to 70% of the Mexican economy is situated in the gray zone: many entrepreneurs run businesses or hire employees “under the table”. Most of those are small catering establishments, food stalls, street and market vendors. All money flows of such businesses are in cash and do not go through any banks. At the same time, Mexican entrepreneurs may open accounts with microfinance organizations, which have card products and even terminals to receive money, but still in most cases they act within informal economy. This means that, legally, they do not exist as entrepreneurs and have to take loans as individuals.
On the other hand, Mexico is dominated by seven large banks that are rather interested in large business, industry and innovative services than in small and medium enterprises (SMEs). Thus, many SMEs find themselves in the so-called banking gap and as a result turn to online MFIs for financial services. A typical example of such business are taconeros (taco vendors). Traditionally, in Mexico blue-collar workers and office clerks do not take lunch in expensive restaurants but rather go to small taquerías where tacos are made on the spot in a few minutes. In any Mexican city, there are at least a couple of taquerías for every neighborhood. These are usually family-owned businesses run by people from suburbs and nearby small towns who move to the proximity of a big city for a better life. Normally they need short-time extra money to buy products for their spots but banks hardly approve loans for these customers due to the lack of formal possessions and neglectable scale of the business. Contrary, for us those are the perfect clients who take loans on regular basis and have a robust payment discipline.
As for the payment discipline, how responsible are Mexican borrowers? What percentage of clients end up in arrears?
About 25% of clients are 30-day overdue.
In terms of debt behavior, do Mexicans share some special features comparing to other countries?
Mexican lending culture has a broad experience of a partial write-offs for the borrowers, willing to collaborate with the lenders on the matter of redemption. If a client’s debt reaches the maximum amount, they are very unlikely to repay it in full: usually they pay back about 30-50%.
Typically, the loans with 90 days past due (DPD) go through a deal with the debtor. It works like this: the client is given a repayment plan (up to 6 installments), which they must stick to. This usually lasts not more than three months. If the client fails, the deal considered to be void. In Spanish, this procedure is called quita. Since the Credit Bureau distinguish full repayment and quitas in their recordings, the client won’t be “whitewashed”. Still, credit history of an individual will be improved.
Talking about the maximum debt amount, how much is it in Lime MX?
We have officially limited the maximum debt amount to 22,000 MXN per one loan, or just over 1,100 USD. It is an officially registered, volunteer, covenant to exclude usury.
Why is such a measure necessary in Mexico? Does each company determine the maximum collection amount based on its own payback calculations?
It is a managerial decision based on the financial calculations. There are two reasons for having a collection limit in Mexico: state and cultural. First, it is recommended by the state, which seeks to prevent the growth of the debt load among the population. Also, on average, 1,000 USD is a manageable sum for any Mexican, which means they can redeem debt themselves. If the debt ceiling was increased to 5,000 USD, such a considerable amount would demoralize most Mexicans. Unable to find the money, they would give in to the “debt trap” and stop trying to repay it at all.
How does the collection process work in Mexico? What are its features?
Unlike in Europe, judicial recovery in Mexico is hardly applied. It is an expensive and long procedure, so it is currently not financially justified to start legal procedures, though we see some legislation improvements here. The penalty for non-payers (seven years on the blacklist) is quite a serious blow for the client. The credit history culture in Mexico is similar to the UK and the USA. Here, if a client gets blacklisted, they experience problems in everyday life: they cannot rent an apartment, take a bank loan, pay for their new cellphone in installments, etc. That is why we are often contacted by the clients who were on our debtor list for three or four years, asking about quita possibilities.
Thus, the value of an overdue portfolio in Mexico does not fall linearly according to the number of days overdue. Roughly speaking, 50-day and 90-day overdue portfolios have about the same value. If a client does not repay within a month, they are likely to fall into a long delay. In the three years that Lime operates in Mexico, we accumulated a fairly large portfolio, including overdue loans, and we are quite successful in collecting it in a “passive” way through a voluntary deal with the debtor. It turned out that such a “self-regulatory” debt mechanism, which implies regulation not through litigation but through social restrictions, typical of the American culture, works in Latin America as well. With this philosophy, when you accumulate debts, you punish yourself: no one comes after you but you are very likely to lose a lot of opportunities. Of course, this does not mean that there are no people in Mexico who try to escape from debts: there are plenty of them too.
As for the collection methods, we use various direct methods. There are some restrictions here, for example, on night calls, calls to third parties. Even so, we are allowed to work quite closely with the debtor in terms of hard collection.
Let’s switch to the product topic. What loans does Lime MX offer? What is the current loan rate?
We offer a diversified rate of 0.5-2% per day: new clients can borrow money at 1.3-2% per day, while for the returning clients a loan at 1% per day or lower is available. We only offer payday loans, and here we have no limits on the number of prolongations either on our part or on the part of the state. The only exception is when a loan reaches the ceiling of 22,000 MXN. In this case, the client must repay the current loan and take a new one.
In addition, we have a penalty rate: if the client is in arrears, we charge them a daily penalty of 1-4% of the amount owed. As previously mentioned, if a client fails to pay back their debt within 30-45 days, they no longer fall in our soft collection portfolio. High penalty rate allows us to “sieve away” the insolvent clients from the portfolio.
Are there any legally established limits on loan rates in Mexico? In general, how strictly regulated are MFIs in Mexico?
The Mexican microfinancial market is comparably liberal. There are some reporting rules to follow but there is no limit on originations or interest rates. The main regulatory restrictions are related to client rights (KYC – Know Your Client), anti-money laundering and fraud. The main institution regulating MFIs in Mexico is CONDUSEF (National Commission for the Protection of the Rights of Clients of Financial Institutions). It is an organization which monitors the rights of bank and MFI clients, ensuring accessible and fair financial services. The CONDUSEF requirements relate mostly to verification: we must make sure that our client is real, that the documents provided were not stolen and the applicant is not trying to impersonate someone else. For instance, we are currently implementing mandatory Proof of Life verification: soon the client will record a video with their ID during verification. In addition, now it’s mandatory to verify every client against government databases.
What are your forecasts on the Mexican microfinance industry development? Are there any new regulatory restrictions planned?
In our sector, regulatory restrictions are a constant risk, increasing by the election. But so far, there seem to be no significant restrictions that can radically change the Mexican microfinance industry in the next couple of years. The state is fighting illegal lending but this does not concern Lime MX as we are a licensed credit provider.
Did the market become more competitive?
In recent years, the competition really intensified. However, it is worth remembering that Mexico is home to about 130 million people, mostly young, so the market is still far from being oversaturated.
Can you share with us the Lime MX main strategic plans?
We are constantly improving the customer evaluation model using the data accumulated over the previous four years. In 2023, the innovations to combat fraud are also planned. Our priority plans are to increase the portfolio and further automate the loan issuance process. However, our interests are not limited to Mexico, the entire Latin American region is in focus.
Let’s start by talking about clients. Generally, who are Lime MX typical customers? Is it true that business loans are heavily developed in Mexico?
Up to 70% of the Mexican economy is situated in the gray zone: many entrepreneurs run businesses or hire employees “under the table”. Most of those are small catering establishments, food stalls, street and market vendors. All money flows of such businesses are in cash and do not go through any banks. At the same time, Mexican entrepreneurs may open accounts with microfinance organizations, which have card products and even terminals to receive money, but still in most cases they act within informal economy. This means that, legally, they do not exist as entrepreneurs and have to take loans as individuals.
On the other hand, Mexico is dominated by seven large banks that are rather interested in large business, industry and innovative services than in small and medium enterprises (SMEs). Thus, many SMEs find themselves in the so-called banking gap and as a result turn to online MFIs for financial services. A typical example of such business are taconeros (taco vendors). Traditionally, in Mexico blue-collar workers and office clerks do not take lunch in expensive restaurants but rather go to small taquerías where tacos are made on the spot in a few minutes. In any Mexican city, there are at least a couple of taquerías for every neighborhood. These are usually family-owned businesses run by people from suburbs and nearby small towns who move to the proximity of a big city for a better life. Normally they need short-time extra money to buy products for their spots but banks hardly approve loans for these customers due to the lack of formal possessions and neglectable scale of the business. Contrary, for us those are the perfect clients who take loans on regular basis and have a robust payment discipline.
As for the payment discipline, how responsible are Mexican borrowers? What percentage of clients end up in arrears?
About 25% of clients are 30-day overdue.
In terms of debt behavior, do Mexicans share some special features comparing to other countries?
Mexican lending culture has a broad experience of a partial write-offs for the borrowers, willing to collaborate with the lenders on the matter of redemption. If a client’s debt reaches the maximum amount, they are very unlikely to repay it in full: usually they pay back about 30-50%.
Typically, the loans with 90 days past due (DPD) go through a deal with the debtor. It works like this: the client is given a repayment plan (up to 6 installments), which they must stick to. This usually lasts not more than three months. If the client fails, the deal considered to be void. In Spanish, this procedure is called quita. Since the Credit Bureau distinguish full repayment and quitas in their recordings, the client won’t be “whitewashed”. Still, credit history of an individual will be improved.
Talking about the maximum debt amount, how much is it in Lime MX?
We have officially limited the maximum debt amount to 22,000 MXN per one loan, or just over 1,100 USD. It is an officially registered, volunteer, covenant to exclude usury.
Why is such a measure necessary in Mexico? Does each company determine the maximum collection amount based on its own payback calculations?
It is a managerial decision based on the financial calculations. There are two reasons for having a collection limit in Mexico: state and cultural. First, it is recommended by the state, which seeks to prevent the growth of the debt load among the population. Also, on average, 1,000 USD is a manageable sum for any Mexican, which means they can redeem debt themselves. If the debt ceiling was increased to 5,000 USD, such a considerable amount would demoralize most Mexicans. Unable to find the money, they would give in to the “debt trap” and stop trying to repay it at all.
How does the collection process work in Mexico? What are its features?
Unlike in Europe, judicial recovery in Mexico is hardly applied. It is an expensive and long procedure, so it is currently not financially justified to start legal procedures, though we see some legislation improvements here. The penalty for non-payers (seven years on the blacklist) is quite a serious blow for the client. The credit history culture in Mexico is similar to the UK and the USA. Here, if a client gets blacklisted, they experience problems in everyday life: they cannot rent an apartment, take a bank loan, pay for their new cellphone in installments, etc. That is why we are often contacted by the clients who were on our debtor list for three or four years, asking about quita possibilities.
Thus, the value of an overdue portfolio in Mexico does not fall linearly according to the number of days overdue. Roughly speaking, 50-day and 90-day overdue portfolios have about the same value. If a client does not repay within a month, they are likely to fall into a long delay. In the three years that Lime operates in Mexico, we accumulated a fairly large portfolio, including overdue loans, and we are quite successful in collecting it in a “passive” way through a voluntary deal with the debtor. It turned out that such a “self-regulatory” debt mechanism, which implies regulation not through litigation but through social restrictions, typical of the American culture, works in Latin America as well. With this philosophy, when you accumulate debts, you punish yourself: no one comes after you but you are very likely to lose a lot of opportunities. Of course, this does not mean that there are no people in Mexico who try to escape from debts: there are plenty of them too.
As for the collection methods, we use various direct methods. There are some restrictions here, for example, on night calls, calls to third parties. Even so, we are allowed to work quite closely with the debtor in terms of hard collection.
Let’s switch to the product topic. What loans does Lime MX offer? What is the current loan rate?
We offer a diversified rate of 0.5-2% per day: new clients can borrow money at 1.3-2% per day, while for the returning clients a loan at 1% per day or lower is available. We only offer payday loans, and here we have no limits on the number of prolongations either on our part or on the part of the state. The only exception is when a loan reaches the ceiling of 22,000 MXN. In this case, the client must repay the current loan and take a new one.
In addition, we have a penalty rate: if the client is in arrears, we charge them a daily penalty of 1-4% of the amount owed. As previously mentioned, if a client fails to pay back their debt within 30-45 days, they no longer fall in our soft collection portfolio. High penalty rate allows us to “sieve away” the insolvent clients from the portfolio.
Are there any legally established limits on loan rates in Mexico? In general, how strictly regulated are MFIs in Mexico?
The Mexican microfinancial market is comparably liberal. There are some reporting rules to follow but there is no limit on originations or interest rates. The main regulatory restrictions are related to client rights (KYC – Know Your Client), anti-money laundering and fraud. The main institution regulating MFIs in Mexico is CONDUSEF (National Commission for the Protection of the Rights of Clients of Financial Institutions). It is an organization which monitors the rights of bank and MFI clients, ensuring accessible and fair financial services. The CONDUSEF requirements relate mostly to verification: we must make sure that our client is real, that the documents provided were not stolen and the applicant is not trying to impersonate someone else. For instance, we are currently implementing mandatory Proof of Life verification: soon the client will record a video with their ID during verification. In addition, now it’s mandatory to verify every client against government databases.
What are your forecasts on the Mexican microfinance industry development? Are there any new regulatory restrictions planned?
In our sector, regulatory restrictions are a constant risk, increasing by the election. But so far, there seem to be no significant restrictions that can radically change the Mexican microfinance industry in the next couple of years. The state is fighting illegal lending but this does not concern Lime MX as we are a licensed credit provider.
Did the market become more competitive?
In recent years, the competition really intensified. However, it is worth remembering that Mexico is home to about 130 million people, mostly young, so the market is still far from being oversaturated.
Can you share with us the Lime MX main strategic plans?
We are constantly improving the customer evaluation model using the data accumulated over the previous four years. In 2023, the innovations to combat fraud are also planned. Our priority plans are to increase the portfolio and further automate the loan issuance process. However, our interests are not limited to Mexico, the entire Latin American region is in focus.