Mexico's Non-Bank Lenders May Now Need Bank Licenses to Survive

• Mexico's biggest non-bank lenders may need to become licensed banks, analysts said, as they manoeuvre through growing market turmoil to avoid the fate of three big peers who defaulted in the past year.
• During the pandemic, non-bank institutions grew to represent 20% of Mexico's private credit market. Also known as "shadow banks," they offer everything from unsecured credit to payroll lending to Mexico's 4-to-5 million small and medium-sized businesses.
• However, three major publicly traded players have since defaulted in a year: AlphaCredit, Credito Real and Unifin. Now banks are less willing to finance non-bank lenders. International bondholders are also reluctant after losing billions of dollars in the recent wave of defaults.
• With confidence in the sector dried up, along with an ensuing liquidity drop and rising interest rates, the remaining players face much slower growth prospects and potentially a fight to survive.
• There is one other option available to such lenders in Mexico - become a bank, likely via an acquisition. That would allow them to lend out customer deposits rather than relying on credit markets, analysts said. Gilberto Garcia, an analyst at Barclays in Mexico, agreed that nonbank lenders would struggle to grow in the current funding climate, making becoming a bank a more attractive avenue.
• Mexican fintech Covalto, previously named Credijusto, successfully went this route last year, acquiring a bank. "We specifically became a bank to prevent the pitfalls of this moment. The stability and security that we have right now, and the long-term benefit of decreasing our cost of capital, that's what we bought," said Covalto co-CEO David Poritz.
• The bank route does not resonate with everyone. Some nonbank lenders hope to stick with the existing business model, which emerged to tackle the country's reported $160 billion funding gap.

(Source: Reuters)