Sunday, October 19, 2008

The Ugly Side of Microlending (Part 3 of 5)

Reproduced from an article in Business Week, December 13, 2007.
Full article http://www.businessweek.com/magazine/content/07_52/b4064038915009.htm
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says Pedro Morales, head of the bank's local legal department. "They take on financial commitments they can't meet." But Niño de Rivera, the bank's vice-chairman, says: "There is no pressure to sign loans, and consumers are encouraged to shop around freely for what best suits their needs."

The Aranas used the $1,315 to buy picture frames, toys, and inexpensive cosmetics, which they displayed in their front room, beneath a dangling lightbulb illuminating a portrait of the Virgin of Guadalupe. Once again, their business faltered. Two textile factories in the area had closed recently, throwing thousands out of work. Mexico offers no government benefits to cushion such adversity. The Aranas saw few customers.

For six months they made their payments, but then, in July, Adrián lost his soft-drink delivery job. By September, past-due notices and interest charges were piling up, and an Azteca collection agent was visiting regularly. "We either eat or we pay off the loan," says Adrián. The despairing family resorted to borrowing $200 from a loan shark at 10% a month. Informal lending of this sort, despite its attendant threat of violence, is not prohibited in Mexico. Azteca's local collections chief, Alejandro Tejeda, says it's a shame that borrowers can land in such trouble. "But these people made a commitment, and they need to live up to it," he says.

With no money to pay the loan shark or Azteca, and fearing that the bank will seize their few belongings, the Aranas are trying to sell their house. So far they haven't found a buyer, and if they do, it's not clear where they would live. They're keeping food on the table, barely, with Adrián's door-to-door sales of tomatoes and herbs, which he transports in the basket of a large tricycle. "We never thought this would happen," he says. "We're sinking fast."

Banco Azteca and Grupo Elektra are key parts of Grupo Salinas, an amalgam of media, telecommunications, and retail businesses controlled by billionaire Ricardo B. Salinas Pliego. A maverick among Mexico's business elite, he has sparked controversy. In 2006 he settled civil fraud allegations by the U.S. Securities & Exchange Commission concerning the finances of his TV network, then traded on the New York Stock Exchange. He denied wrongdoing but paid $7.5 million and was barred for five years from serving as an executive or director of companies listed in the U.S.

The Salinas family began selling furniture on credit more than a century ago in the northern city of Monterrey. Ricardo, 51, says he learned early in life that those who work in Mexico's informal economy, without pay stubs or much collateral, and who can't afford sofas or blenders outright, will snap up merchandise if offered seemingly manageable terms. "If you want to become rich, sell to the poor," he recalls his grandfather instructing him.

He learned to get even richer by lending to the poor, and to those who are better off. Azteca targets 14.5 million Mexican families earning $5,100 to $33,600 a year. Mexico has a total population of 109 million, with a median annual household income of $7,297. Mainstream Mexican banks cater to the wealthier elite, while less than one-third of working-poor families have access to any banking services at all.

Azteca has absorbed Elektra's ethos of high-pressure employee quotas and incentives. Elektra clerks, clothed in the store's signature bright yellow, earn commissions on top of their standard weekly salary of $120 for tacking on extras such as warranties, life insurance, and even long-distance bus tickets. The biggest score comes from persuading a customer to spread payments over the longest possible period, 104 weeks. "Sell on credit and earn much more money!" an online company training manual states.

MOTORBIKE CAVALRY

The strategy has far exceeded the expectations of Grupo Elektra executives. The bank already contributes one-fifth of its parent's $5 billion in annual revenue. It boasts a consumer loan portfolio of $2 billion and a healthy 22.3% return on shareholder equity.

The main Elektra/Azteca branch in San Martín Texmelucan aims to meet a daily target of $9,000 in fresh loans.

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