Rural Financial Sector Reform in Mexico:

Visit Report, July 2006

1 Introduction: Mexican Economy and the Financial System ..............................................1

2 Public Policy for the Transformation of People’s Savings and Credit Sector ....................2
3 Legal Framework and the Network Model .........................................................................3
3.1 People’s savings and credit Law – Ley de Ahorroy Credito Popular (LACP).................... 3
3.2 Network Model ..................................................................................................................... 3
4 BANSEFI Assistance to the Sector.....................................................................................5
4.1 BANSEFI Bank Operations: Promoting a Savings Culture ................................................ 5
4.2 L@ Red de la Gente(People’s Network)............................................................................... 7
4.2.1 Remittances ..................................................................................................................................... 7
4.2.2 Government program payments ....................................................................................................... 7
4.2.3 Savings for Housing: ....................................................................................................................... 7
4.3 IT PLATFORM: “Integra T” .............................................................................................. 8
4.4 Second Tier Bank .................................................................................................................. 8
4.5 Pension Fund: Afore de la Gente.......................................................................................... 8
4.6 Technical assistance .............................................................................................................. 9
4.7 Training and Technical Assistance to Supervision Committees ........................................ 10
4.8 Impact Studies .................................................................................................................... 11
5 Transformation of an apex bank – from Banrural to Financiera Rural .......................... 11
6 Rural Microfinance Technical Assistance Project – PATMIR ......................................... 13
7 Main lessons learnt........................................................................................................... 14
 Mexican Financial Cooperatives Reform:
Visit Report

Mr YSP Thorat, Chairman, NABARD, Mr Vijay Mahajan, Chairman, BASIX and member of
the National Committee on Financial Inclusion, and Mr R Krishnamurthy, CGM, NABARD,
had an opportunity to visit Mexico at the invitation of the Banco del Ahorro Nacional y Servicios
Financieros (BANSEFI). We met the officials of the Ministry of Finance – People’s Savings
Credit Bureau, the supervisory authority - National Banking and Securities Commission
(CNBV), the apex rural development finance institution Financiera Rural, the special
microfinance development project PATMIR of the Ministry of Rural Development, and of
course, BANSEFI. We studied the overall rural financial sector reform and particularly the
reform of the savings and credit cooperative system in Mexico.

1 Introduction: Mexican Economy and the Financial System

Mexico has a population of nearly 106 million in 2005. The GDP at USD 768 billion is about
the same as India’s, but was growing at a modest 1.8% pa. The GDP per capita is USD 7236 (in
2005), almost ten times India’s. Income distribution in Mexico remains highly unequal, with the
top 20% of income earners accounting for 55% of income. About 28% of the rural population is
below the poverty line and 20 percent is extremely poor.

Of the total land area of 200 million hectare in Mexico, only 25 mn ha is cultivable. Agriculture
accounts for only 45 of the GDP but 18% of the population depends on it. In 1917, the
government implemented the ejido system, in which the land is owned by the government and is
supported by a national bank. According to the 1960 census, 23% of Mexico's cultivated land
belonged to ejidos. In 1992 was the law was amended so that small farmers could sell or rent
out communally owned land, but the process of consolidation is still very slow.

In the past, the government encouraged production of basic crops such as corn and beans by
maintaining support prices and controlling imports through the "National Company for Popular
Subsistence" (CONASUPO). After the North American Free Trade agrrement (NAFTA) came
into effect, CONASUPO was to be gradually dismantled, while two new mechanisms were
implemented, PROCAMPO and Alianza, with the goal of increasing the use of modern
equipment and technology in order to increase land productivity. The government is continuing
PROCAMPO, the rural support program which provides the approximately 3.5 million farmers
who produce basic commodities - about 64% of all farmers - with a fixed payment per unit area
of cropland. In recent years, the government has increased these subsidies, mainly in white corn,
in order to reduce the amount of imports from the United States.

The Mexican financial system is quite well-developed: However, in contrast to India where more
than 80% of the financial sector assets are in the public sector, in Mexico, 82% are in the hands
of foreign institutions. The total financial sector assets were over USD 300 billion in Mar 2005,
but rural credit was only USD 8 billion, which is well below even the 4% share of agricultural
output to GDP and certainly below the 18% share of population in agriculture or in rural areas.
Thus the systemic neglect of rural Mexico by the mainstream financial sector is obvious and
similar to that in India.
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The distribution of financial sector assets in 2005 was as follows:
 Commercial Banks - 42% including Banamex (Citi) and Bank Commerce
 Banca de Desarrollo (development bank), Nacional Financiera, BANSEFI etc. 11%
 Siefores – pension funds -12%
 Inversion (Investment) societies -11%
 Seguros – (Insurance cos) -18%
 Sofipos (like NBFCs) - 4%
 Rest – Amendadores, 0.6%, Casa de Bolsas, 0.7%, Credit Unions 0.3%, etc.

In Mexico, as in many emerging economies, the formal financial system has left the majority of
the population without access to financial services. Consequently, low-income households use
informal financial markets, which functions with high interest rates and no regulation. This
situation has limited the growth of the productive activities, as well as the economic
development at the regional level. Additionally, it becomes an obstacle to alleviate poverty.
Providing formal financial services for Mexican emigrants was also needed, in view of the
importance of remittance flows (over USD18 billion in 2005) to the Mexican economy.

This situation led to the creation of an array of entities with different legal status aiming at
serving the demand for financial services of the poor. Many of these have been in the market for
more that 50 years but have not been regulated and supervised by the financial authorities. This
includes the people’s savings and credit sector, which is comprised of nearly 500 cooperative
and about 100 privately owned financial intermediaries, strongly linked to their communities.

In terms of overall spread of banking in Mexico, 28 million bank accounts for a population of
110 million shows wide outreach. But this is not uniform geographically or across income
segments. Of the nearly 11 million poor households, 4 million had accounts with people’s
savings and credit sector and 3 million with BANSEFI branches. That still means about 35%
poor households were without a bank account.

2 Public Policy for the Transformation of People’s Savings and Credit Sector
In 2001, President Vincente Fox’s Administration, with the approval of the Congress, designed a
policy in order to transform this semi-informal financial sector into an opportunity for deepening
the financial system. This policy includes two pillars that will have to converge in time

 Legislative action by Congress on an appropriate Legal and Regulatory framework

according to best practices.
 Governmental investment to strengthen and upscale the institutional capacity of the sector
through technical assistance and training.

The government also enacted a law to establish a Development Bank (BANSEFI) as the state
vehicle to promote savings and other financial services and coordinate the transformation of the
semi-formal sector. Through BANSEFI, the government invested in start ups of Central
Supporting Entities for the Sector: a Second Tier Central Bank, an IT Platform, L@ Red de la
Gente and a pension fund. It is planned to transfer the ownership of these to the sector over time.
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3 Legal Framework and the Network Model

3.1 People’s savings and credit Law – Ley de Ahorroy Credito Popular (LACP)
The LACP is a functional law: it regulates savings and credit activities and not institutions. Only
two legal forms can be licensed to operate under the law:

1. Savings and Credit Cooperative Societies (SACCOs);

2. Popular Financial Partnership (PFPs - joint stock companies - for-profit).

The law rests upon Auxiliary Supervision: Federations of SACCOs and PFPs are given a
mandate by the National Banking and Securities Commission (CNBV) to supervise their member
entities. CNBV issues the regulation and holds ultimate responsibility in the supervision of
financial intermediaries, federations and confederations.

The law protects deposits through a Private Deposit Insurance Fund. This is capitalized by
contributions from the institutional members, based on risk profiles.

The law allows for a differentiated operations scheme, based on Institutional Development
Levels. Licenses can be given to four different levels of entities. The level determines the
products they can offer and the regulation they will have to comply with.

3.2 Network Model

The legal and conceptual model of the savings and credit sector in Mexico is based on
social/cooperative banking networks in Germany, the Netherlands and in the Quebec province of
Canada. Thus, Mexico had a chain of over 500 Savings and Credit Cooperatives (SACCOs),
established over the past 50 years. In addition, Mexico has privately owned financial
partnerships (PFPs), which are for-profit institutions with a local base.
The Network Model promotes a distribution of functions between the members of the people’s
savings and credit sector. This increases the efficiency and the competitiveness of the members
of the system.

Base Entities (SACCOs, PFPs) are responsible for the main activities on the part of the network,
and are in direct contact with the customers and provide the main financial services. The small
size of these entities is crucial to keep their competitive advantage. Central entities provide those
activities where economies of scale and scope can be used to strengthen and upscale the
activities of the Base Entities.

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 L @ Red
de la Gente Branches

SACCO SACCO PFP PFP Entities

Base Entities Levels I to IV

Central
Entities DEVELOPMENT BANKS bansefi
FEDERATION
FEDERATION Subsidiaries

CONFEDERATION

SACCO = Savings and Credit Cooperative, PFP = Popular Financial Partnership

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4 BANSEFI Assistance to the Sector
In order to support and coordinate the development of the people’s savings and credit sector, in
November 2001, the National Savings Patronage (PAHNAL) was transformed into the National
Savings and Financial Services Bank (BANSEFI) with the aim of achieving three objectives: to
promote savings, to develop “central” entities and to support the sector.

The fact that Congress had approved laws to transform the sector and that the Government was
actively supporting this transformation and promoting its development, attracted the international
donors to participate in this endeavor. The first was a FOMIN/BID Grant of USUSD 3.5 Million.
This grant triggered the project when it was in the design stage. Then the World Bank extended
a loan of USUSD 140 Million to support the transformation of the sector and to strength its
institutional capacity. The German Government also gave grant of USUSD1 Million for
technical assistance for the Federations. BANSEFI established four “central entities”:

BANSEFI
L @ Red de Savings and Pension Fund:
IT
la Gente Credit “Afore de la
Platform
Institutions’ Bank Gente »

Savings and Credit Entities (SACCOs and PFPs) and BANSEFI’s Branches

 Provide those activities where economies of scale and scope

Central Entities can be used to strengthen and upscale the activities of the
Base Entities.
 Provide financial products in direct contact with the market.
Base Entities The small size of these entities is crucial to keep their
competitive advantage.
 Provide Government financial support through fiscal
Assistance transfer; offered temporally to help on the transformation of
the Savings and Credit Institutions accordingly to the new
law.

4.1 BANSEFI Bank Operations: Promoting a Savings Culture

Mexico has had a long history of the government promoting small savings. This was carried out
by an organisation called PANHAL for over 50 years. In 2001, PANHAL was transformed into
BANSEFI. A major drive was launched to mobilize savings. In order to promote saving
behavior, an account can be opened with less than USUSD5 and no fees are charged and market
interest rates are paid. As a result, savings accounts have increased from 850,000 to more than

5
 3.2 million in April 2006 (268%). BANSEFI network includes 548 branches, half of which are
located in places that the presence of the Commercial Banks is minimum or non-existent.

The government sees savings as a vehicle for the people’s well-being. In the recent tmes, the
savings bank account has been used a vehicle to channel payments under government welfare
programs such as “Oppurtunidades” and the federal subsidized housing programs. Remittances
from migrant family members are also routed through the same account. By this process, it is
hoped that at any time the poor will maintain a certain balance in their savings accounts, which
they can draw upon for contingencies and consumption when needed. This prevents them from
taking high interest money lender loans. It also enables them to build a history which can be sued
to take commercial loans, mortgage loans, enable insurance payments and also save for pensions.

Migrants
Remittances
Pension

Mortgage
Loan

Governmental
Programs Savings Insurance
Account

Commercial
Loans

Other
Financial
Products
Federal Housing
Programs

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4.2 L@ Red de la Gente(People’s Network)

L@ Red de la Gente (People’s Network) is a commercial alliance between BANSEFI and the
regulated intermediaries of the people’s savings and credit sector that join voluntarily. This
alliance facilitates the sale and promotion of financial products and services in a sector of the
population that does not have access to them, as well as promoting the distribution of aid from
government programs. In 2005, there were 72 members with 1,211 branches (including
BASNEFI). 60 more institutions are coming in 2006. Most of them are located in semi-urban and
rural areas, where commercial banks usually have no presence. The following services are
enabled from the outlets (SACCOs, PFPs, BANSEFI branches and MFIs), who take a
membership of the L@ Red de la Gente:

 Inward Remittances from Mexicans living abroad, to their families in Mexico

 Government Program Payments aimed at over 5 million poor households
 Housing loans for the poor

4.2.1 Remittances
A potential segment of BANSEFI’s market is migrants living abroad, estimated in 25 million
people, 75% of whom have no access to financial services. “L @ Red de la Gente” pays an
average of 90,000 remittances monthly that represent a 1% market share, approximately 360
million pesos. L @ Red de la Gente’s money transfers have grown from 25,000 on Januay 2005
to 90,000 on May 2006, which represents a 100% growth during the year. L @ Red de la Gente
has established agreements with Money Gram and others; in addition to two banks for the
transfer of remittances: US Bank and Bank of America, with the approval of US Federal Reserve
and Mexico’s Central Bank. Fees are coming down – sometimes down to 1%. Now volume is
USD20 million per month, but this is still 2% of the mkt (USD 18 billion last year).

4.2.2 Government program payments

“Oportunidades” is a government program that provides health, nourishment and educational
support for 5 million of the poorest families. As of December, 2005, 1.2 million savings accounts
had been opened banking the benefited families for the first time. A total of 1.2 million families
received cash payments through BANSEFI. Under “Jovenes con Oportunidades”, students who
finish high school through the support of “Oportunidades” receive an additional government
support of up to USUSD300 USD by opening a savings account that can be used to continue
their studies.

4.2.3 Savings for Housing:

Bansefi has established joint programs with the main Government Housing Institutions
(INFONAVIT, SHF, Fonhapo) to promote saving behavior among potential home owners to
obtain a mortgage loan. The bank offers a wide range of savings accounts for this purpose
(Cuentahorro Infonavit, Ahorrasif, Viviendahorro) and will be extending these products to the
Savings and Credit Institutions. Ahorrosif is designed also to promote home loans among the
7
informal sectors. In all these products, a savings account is used to trigger the access to a
mortgage loan by generating credit history. As of September 2005, nealry 20800 people had a
savings account to obtain this type of loan.

4.3 IT PLATFORM: “Integra T”

BANSEFI is spearheading the creation of a technology platform which will allow the Popular
Savings and Credit Sector to operate as a network, consequently minimizing costs of operation
and supervision and improving decision-making processes. The technology services are provided
mostly through outsourcers. The Technological Platform cost USUSD90 million and was
financed with a part of the loan from the World Bank. As of May 2005, five savings and credit
institutions are already using the platform and 83 more entities that have singed letters of
intention to enter the platform. The technological platform that BANSEFI offers to the sector is
integrated by:

 Applications: Shared with the necessary functionality to manage its products, clients,
branches, internal operations, planning and compliance with the regulation. (IBM and Temenos
Core Banking)
 Data Center: Shared to store the systems and the data of each intermediary securely and
independently. (ATOS Origin)
 Communication Network: This interconnects all intermediaries with their branches and to
external institutions with which they will collaborate for commercial or regulatory issues.
(Global SAT)

4.4 Second Tier Bank

BANSEFI is being transformed into a Second Tier Bank for savings and credit entities, offering
financial services to these institutions in order to promote the following:
 Increasing their income by expanding the range of products available to their customers and
members;
 Reducing their costs of regulation and operation; and
 Improving management efficiency and the quality of their services.

The products are: B2B (BANSEFI to SACCOs+PFPs) – cash management, asset management,
trusts, Short Term and Long Term funding and B2Cthru B (BANSEFI to customers through
SACCOs+PFPs) – debit/credit card, ATM/POS management, electronic money transfers, and
foreign exchange. The cost of the products and services offered by BANSEFI is competitive and
the entities choose freely to use these products and services.

As the people’s savings and credit sector is capitalized, the participation of the Federations in the
paid-in capital of BANSEFI will be promoted

4.5 Pension Fund: Afore de la Gente

The objective is to offer a pension service to clients in the informal sector who do not have it,
including migrants through their remittances. Bansefi, together with L@Red de la Gente, has
presence in almost 600 cities, with more than 1,200 branches, with the aim of having more than
8
1,500 in the near future. This presence allows it to reach almost 300 places in which there is no
other pension fund offered. Given the closeness between clients and L @Red de la Gente, this
pension fund will be able to provide personalized attention to the users, and therefore, better
information of the pension system, in order for them to make a better decision.

4.6 Technical assistance

BANSEFI in coordination with World Bank, Financial Authorities and the Sectoral Federations,
has organized a program for providing training and technical assistance to the sector. The aid is
temporary –lasting as long as the transition period of the LACP. The aid is destined for the
federations, the SACCOs and PFPs and the supervisory bodies (both in CNBV and in
federations). The program includes technical assistance for the transformation and training in
strategic issues for complying with the law (credit, risk management, accounting, governance,
internal control, prevention of money laundering).
The transformation of the people’s savings and credit societies into the new regulatory and legal
framework was facilitated while trying to strengthen the operation and functioning of the savings
and credit societies and promoting the managing of these societies in the medium and long-term
and within the new institutional framework established in the LACP. This investment
contributed to the creation of a well-regulated and privately-controlled institutional credit and
savings sector. This then contributes to the deepening of the Mexican financial system by
banking the unbanked.

Prior to authorizing the transformation of an Entity under the law, there was the need to evaluate
their financial condition and their capacity to comply with the regulation. This is being done by
the Federation’s Supervisory Committee with the assistance of an external expert. The evaluation
standards and diagnose methodologies include financial, operations and governance indicators
related to the legal framework and its regulation. Evaluation standards classify the financial
intermediaries as follows.

A. Intermediaries that are ready to be authorized;

B. Intermediaries that require an improvement program to be authorized;
C. Intermediaries that will have to split, merge or reorganize their structure and internal control;
D. Intermediaries that will have to be liquidated in an orderly manner.

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 As of December 2005

Total
Classification Assets
Number % Membership % %
(Millions of
pesos)

Authorized 9 2.4 210,652 6.8 1,965,091 4.9

B+ 113 29.7 2,177,542 70.0 26,907,121 67.0
B 191 50.3 581,470 18.6 9,206,123 22.9
C 67 17.6 143,144 4.6 2,074,241 5.2
Total 380 100 3,112,808 100 40,152,576 100
[B+ is an equivalent to A classification after the last extension of the transformation period]

As can be seen, only about a sixth of the institutions, accounting for about 5 percent of the
membership and assets, are in the C category, needing merger or restructuring.

Another interesting feature is that based on classification, the entities are permitted to undertake
different functions. Some can only take savings, others take savings and offer credit including
housing loans; while still others can do all this and participate in the payments system.

4.7 Training and Technical Assistance to Supervision Committees

In May, 2001, even before the LACP became effective, started the training and technical support
for the first supervision committees. This work is considered essential to improve the practices of
the savings and credit sector. Development international Desjardins (DID), Quebec, Canada was
in charge of the project. Its role was to certify the Supervision Committees to operate in
agreement with LACP, support the certified committees of supervision by training of auxiliary
supervision personnel, and help the supervision personnel of the CNBV in some specific aspects.
Twelve Supervision Committees of Federations were certified by DID: According to regulation,
Supervision Committees will need to renew their certification every two years. The transition
period expired last December 2005, thus since January 2006 the societies must be authorized or
in prerogative extension regime.

Over 352 financial intermediaries have benefited from training projects provided by expert
consultants. With the training component of the program, BANSEFI expects to complement
Technical Assistance with enhanced human capital capacities. The topics included Accounting I
and II levels, Credit Management, Risk Management and Financial Analysis. These workshops
represent an important tool in the creation of a new culture of duties and responsibilities, free
from the misconceptions of failed policies of the past.

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4.8 Impact Studies
To evaluate the transformation of the People’s Savings and Credit Entities and their impact in
house holds well-being and in the economic development, BANSEFI commissions some impact
studies as well. This program is comprised of two main components with subcomponents related
to each other:

House hold-level component:

 Panel house hold survey. To be done in five consecutive years (2004-08), with a sample
of 5700 house holds. Analysis by Robert Townsend & C. Woodruff.

 Qualitative study. In depth interviews of a sub-sample of 120 house holds from the panel
survey sample (20005 and 2007). Analysis by Marguerite Robinson.

 Comparisons with surveys from other institutions (INEFI).

Institutional component:
 Interviews of savings and credit institutions with clients interviewed in the panel survey
(sample selected based on the region, qualification and size of the entity) to obtain
information on changes in clients, products, balances, staff, etc. Analysis by Robert
Townsend & C. Woodruff.

 Analysis of financial sector data and economic indicators, among others

5 Transformation of an apex bank – from Banrural to Financiera Rural

The history of rural credit banks in Mexico begins in 1926 when the first public bank focused on
agricultural development, Banco Nacional de Credito Agricola, was established. It grew into
several regional entities, with a national apex. In 1975, this was reorganized into the Rural Credit
Bank (Banrural) to unify existing agricultural and rural state banks. Banrural ceased operations
in 2002 when Congress passed a law authorizing the creation of a new development agency:
Financiera Rural (FR) which started operations in July 2003. The tailor-made credit products
offered by FR are
 Short-term liquidity guaranteed by CDs.
 Mid-term unsecured loans.
 Mld-term working capital
 Long-term, asset-backed loans.
Sector-specific programs
 Procampo (government guaranteed)
 Parametric credit lines for specific products
 Agroindustry providers
 Microcredit
 Credit Unions
 Other financial intermediaries
 Product programs: sugarcane, rice, cotton
 Regional programs

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 Operative Model
RURAL DEVELOPMENT AGENCY

Initial Endowment of USD 1.72 billion**

USD 1,534 M , USD 79 M USD 49 M

Credit pre-operating Technical
expenses Assistance

Supervised Rural Financial Intermediaries

Informal Rural Credit Institutions

Technical assistance for credit enhancement and the creation of RFIs

Credit

Of the initial USD 1.6 billion, USD 46 million could be used for the acquisition of Banrural
assets (Other than loans). Since it initiated operations, FR has granted nearly 350,000 credits,
reaching 15% of total rural financing in Mexico, through the following channels:

 Rural Financial Intermediaries (Regulated and Supervised by CNBV)

 Credit Unions (Uniones de credito)
 Financial Cooperative Associations (Sociedades Financieras Populares).
 Thrift Cooperatives (Sociedades Cooperativas de ahorro y Prestamo).
 Depository Warehouses (Almacenes Generales de Deposito).
 Informal Rural Credit Institutions (“Quasi Tier II” Lenders)
 Agribusinesses
 Non-regulated financial intermediaries
 Microfinance organizations
 Local producer organizations

Loan Disbursement averaged by Banrural were USD300.2 million in 1994-2002 whereas

Financiera Rural disbursed USD 1,163.4. Non performing loans ratio for Banrural 1988-2002
was 26.7% whereas for Financiera Rural it was 2.5% in 2005.

The number of credits for the years 2004 and 2005 are 150,485 and 176,921 respectively, with
an increase in 17.6%. Loan amounts for the years 2004 and 2005 are USD 877.2 million and
12
USD1191.3 million respectively, with an increase in 35.8%. Non Performing Loans for the year
2004 and 2005 are 2.9% and 2.5% respectively.

Loans to RFIs for the year 2004 and 2005 are USD76.4 million and USD209.8 million
respectively, with a increase in 174%. It is estimated that by the end of 2006, Financiera Rural
will have granted loans equivalent to 2.5 times its original loanable endowment and recovered
loans for nearly 1.7 times that endowment.

FR’s operations with RFI’s (loans, assistance and technical support) has resulted in the
strengthening of the Rural Financial System, particularly Credit Unions. As of September 2005,
the loan portfolio of Credit Unions operating with FR represented 32.3% of the loan portfolio of
all Credit Unions that are eligible to become clients.

6 Rural Microfinance Technical Assistance Project – PATMIR

In addition to the efforts of the Finance Ministry, the Department of Rural Development –
SAGARPA (sector agrciltura, gandaeria, desarollo rural pesca alimentacion) established a
program –PATMIR – to spread the outreach of microfinance services to the poorer areas. The
budget of SAGARPA is US$5bn pa, 70 percent of which goes to ‘pro campo’ programs,
subsidizing farmers (12 million hectares, of which 6 mn have irrigation) after NAFTA..

Ms Gabriela Zapata Alvarez, Director, Project on Rural MF TA (PATMIR) explained that it is a

savings based, demand driven, sustainable program, in marginal rural areas (>70% population in
towns of <10K pop, with incomes less than $ 2/day per capita, covering the cross-section of
population, not just women. There is no funding for credit lines, by design. PATMIR is only
savings driven.

The main component was technical assistance (TA). Multiple models, legal forms and TA
providers were encouraged. PATMIR hired high quality consultants for 3-5 years and allocated
them to different provinces as follows:

 Canadian Desjardins: Chiapas-Tabasco, Huastecas, Pubela provinces ;

 German DGRV in Guerrero, Oaxaca and
 USA’s WOCCU: Veracruz, Michoacan.

Desjardins began in Chiapas, which is the poorest state but with lots of donor and government
funds. They set up an institution from scratch which has got to Level 2 and B+, with multiple
services. The Germans were very grassroots and participatory and took long initially, then took
off. WOCCU was quite efficient in what to do. TA providers tend to have 10-20 people, of
whom only 1-2 are foreigners, rest are Mexican and further mostly local. In each case, they
concentrated on
 Consolidation of existing MFIs – coops, PFPs, NGOs
 Creating new ones
 Expansion of outreach of both to marginal rural areas

13
MFIs were encouraged to provide multiple financial services. New MFIs were formed where
none existed, collecting “social capital” (shares) - average USD40, range USD15-80 – per
member before giving services. The results of the PATMIR 2001-06 are given below:
 155,000 members (existing 55000 plus new 100,000),
 34 MFIs (13 existing, 13 new, 8 expanded);
 187 branches (37 existing, 150 new).
 Mobilizing savings of USD 20 million.

The project cost USD34 million. In terms of strict cost benefit ratio, this looks very low, but the
fact is that the project has created a sustainable social infrastructure for distribution of financial
services. Thus it is an investment in public goods.

7 Main lessons learnt

Some lessons from the Mexican experience of restructuring the rural financial system.
 In Mexico, like in India, a large cooperative sector operated for more than 50 years. But
unlike India, the sector did not have a history of high overdues and defaults. In fact, most
of the institutions remained healthy and even weathered the 1994 macro-economic crisis, when
several commercial banks went under. This was the period when due to hyper-inflation, the
interest rates went up to 100% pa and more. The reason for this relatively good
performance was the involvement of members and local management of cooperatives.
 We of were also told by several people that local politicians kept out of cooperatives.
Perhaps the reason was that for 70 years, Mexico was ruled by the monolithic PRI, and any
aspiring politician had to go up the ranks of PRI, rather than other institutions. Another reason
may have been that the “big money” in rural areas was channeled through Banrural, which was
rife with problems, having as many as 27% NPAs before it was wound up in 2002. So as the
rural savings and credit coops served smaller farmers, not much outside big money was
involved and politics was kept out.
 Savings has much more precedence over credit in the Mexican rural financial system.
Even in the names of institutions this is highlighted. In contrast to India, where savings does
not occur in the name of PACS, Mexican coops are called “savings and credit cooperatives”.
 In recent times, there has been an attempt to offer a whole range of other financial services
– remittance receipts, government payments, housing mortgage loans, pensions and insurance.
 To ensure that financial services are provided in a modern, reliable and cost-efficient manner,
the capacity for doing so has been built centrally and top down, from BANSEFI, with its
“people’s network” L@ red de la Gente, which ensures the standardization of products and
processes, and as the same time is offered through a large number of outlets of primary
institutions – SACCOS, PFPs, bank branches and MFIs. This would be the equivalent of SBI
offerning all its products through PACS in India.
 The Mexican rural financial system now has a regulatory framework according to the best
international standards. However, supervision is delegated to the autonomous Supervisory
Committees of the federations of SACCOs and PFPs.
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 The adoption of best regulatory practices, auxiliary supervision, creation of a technology
platform, a franchise network (L@ Red de la Gente) for wide distribution, coupled with
technical assistance to the primary institutions, using the best expertise available
internationally, were the key drivers in the success of the reform package.
 The less developed areas and lower income groups require a special effort, which may
not show a high financial efficiency but build a long run access infrastructure, as was done by
PATMIR. This was done with the help of the best international expertise.
 At the same time, to promote rural growth, there is a need for a financial entity which can
offer investment and production credit to larger farmers, farmer’s associations/
cooperatives and to agro-processing groups/companies. This can be done on a sustainable basis,
as can be seen from the experience of Financiera Rural. There are lessons in this for
restructuring of our long-term credit coops (land development banks).

Main Contact: Mr Javier Gavito, Chief Executive Officer, BANSEFI.

e-mail: jgavito@bansefi.gob.mx Phone: +52-555-481-3444

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