Fitch: Mexican Payroll Lenders Unaffected by Education Sector Turmoil; Concentration Poses Risks
There are a number of financial entities in Mexico focused on payroll lending to public sector employees at the municipal, state and federal level, which consist mostly of non-bank financial institutions and a niche bank. Fitch has reiterated that this lending business is exposed to political, reputational and event risks; which has been evident throughout the different phases of business and political cycles. However, Fitch believes that the largest lenders with a long track record in the segment, including their experience through changes in public administration over the political cycle, should be able to comfortably face these risks over time.
The public education workforce has been an important target market for payroll lenders in Mexico, due to the number of potential debtors and their employment stability. Public protests from Mexican teachers in specific regions of the country are not new. However, over the past few months, members of the public educational work force started mobilizing across several states, mainly in the southern and central part of the country. These more widespread protests were underpinned by educational reforms enacted in 2013.
While loans to the public education sector represent a relevant portion of the rated financial entities' portfolios, their exposure to teachers affiliated to the Coordinadora Nacional de Trabajadores de la Educacion (CNTE), the union leading the protests, is relatively low compared to the portion of loans granted to members of the Sindicato Nacional de Trabajadores de la Educacion (SNTE). Payroll lenders do not expect massive layoffs in the education sector, and they continue to provide resources to the segment. However, there is a possibility according to the law that teachers that continue protesting permanently and who do not attend classes, might have their salaries withheld or even cancelled, which would likely affect their debt repayment capacity.
Payroll lending to government employees continues to grow, since this is a relatively new product in the financial system (roughly over 10 years) and there is still a large unattended customer base. Fitch believes that financial entities that have been lending to government employees for longer have learned from past experiences and have become relatively more cautious at granting loans, refining their underwriting standards in terms of the applicant's level of indebtedness, work stability, payment capacity, and in establishing strategies to deal with some other intrinsic operational features related to government agencies (such as complex authorization processes and timing in delivering retained payments).
Although most financial entities continuously make efforts to diversify their lending portfolio and to reduce exposure to a limited number of government entities or agreements, Fitch believes their 'niche' nature somehow limits their efforts and still exposes them to high concentrations. In order to reduce some of the risks of the sector, the recent trend has been moving towards pensioned workers and focusing on federal government entities rather than only state and municipal entities.
Fitch does not believe that the business model for payroll lenders will become fairly diversified in the foreseeable future, as financial institutions are not planning on slowing activity in this market. Any additional operational risks usually comes from the collection process rather than the segment targeted since payroll lenders depend on employers to withhold and transfer payroll payments. However, this has been somewhat alleviated for the education sector as a result of the centralization of payments through the Tesofe (Tesoreria de la Federacion), an entity responsible for the financial management of the resources and values of the federal government, including payroll periodic payments.