Monday, October 27, 2008

The Ugly Side of Microlending (Part 4 of 5)

Reproduced from an article in Business Week, December 13, 2007.
Full article
The money isn't spewed out carelessly. With efficiency unusual in the Mexican marketplace, the bank deploys a cavalry of credit and collection agents on motorbikes. These jefes de crédito y cobranza visit borrowers within 24 hours of a purchase or loan application.

Juan Carlos Pérez Lopanzi, a 25-year-old college graduate who studied international commerce, serves as one of 13 credit agents in San Martín Texmelucan. One October morning, he rumbles up to the home of Maria Teresa Hernández as neighbors peer from their windows. Hernández, a 50-year-old street vendor, wants to borrow $460 for a new hot dog wagon. She isn't home, so Lopanzi questions her adult daughter about the family's finances. Do they rent or own? Have they lived there at least two years? What do they spend on food?

With each answer, Lopanzi taps the screen of a handheld computer. Data will be routed to Azteca's operations center in Mexico City. The state-of-the-art system keeps the cost of processing 7 million transactions a day to a mere 3 cents per transaction, according to Azteca. "It's amazing—all this is for poor people," says Juan Arévalo Carranza, the bank's technology chief.

Back in dusty San Martín Texmelucan, Azteca's proprietary software alerts the agent, Lopanzi, that Hernández, who earns $276 a month, doesn't qualify for a $460 loan. He offers $370 instead. That will require $10.60 weekly payments for 12 months for an APR of 85%. Hernández will end up paying $551. "If she had more income, she could have a shorter payback period, and the interest rate would be lower," the agent explains to the daughter. She shrugs, then nods in acceptance.

"Tell her she can go by the store this afternoon for her check," Lopanzi says, as he registers the serial numbers of the daughter's stereo, DVD player, TV, and refrigerator. The items' resale value, preprogrammed into Lopanzi's digital device, must add up to around double the value of the loan. If the woman fails to pay, Azteca will cart away the daughter's possessions and sell them in a Grupo Elektra used-goods store.

Azteca deducts the depreciated value of seized goods from outstanding loan balances, so if someone who doesn't pay has enough possessions to cover the debt, the bank considers it paid. Azteca bars such customers from borrowing again but doesn't count them as having defaulted, which helps explain its stated loan failure rate of just 1%. Banks serving more prosperous clients average a 5.3% default rate on consumer loans.

Mexican lenders benefit from attitudes cultivated in a society lacking a welfare safety net, personal bankruptcy system, or meaningful consumer protection laws. Credit bureaus have recently sprung up in Mexico, including one that Elektra helped start in 2005, and many among the working poor worry about sullying their new credit ratings. They assume that, one way or the other, they or their relatives will just have to pay back whatever they borrow, says Gustavo A. Del Angel, an economic historian who studies micro-finance at the Center of Research & Economic Teaching in Mexico City.

Borrowers who fall behind realistically fear public embarrassment. Photocopies of debtors' national identification cards sometimes turn up on telephone poles and at central marketplaces with warnings that say "DON'T LEND TO THIS PERSON!" Six months ago, an Azteca agent in San Martín Texmelucan posted such flyers. The company fired him. "Our system is not intended to be publicly shaming," says Niño de Rivera, Azteca's vice-chairman, but he acknowledges it "is intended to exercise peer pressure."

Even as Mexico's economy modernizes, companies operate with minimal oversight from government. Luis Pazos, head of Condusef, Mexico's regulator of consumer financial transactions, says his agency logs complaints about Azteca's collection methods and the adequacy of its disclosure of credit terms. "We've talked with that bank about the bad manners they've had," he says. But Condusef hasn't taken any substantial action against Azteca, which says it scrupulously polices the behavior of its employees.

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