As Mexican bankers attempt to shore up against tidal waves caused by systemic financial collapse north of the border, their first move has been to rein in lax consumer lending practices that enable Mexicans to spend far beyond their means.

For the first time in six years, Mexican banks issued fewer rather than more credit cards during the second quarter of 2008, largely in response to soaring unpaid consumer debt.  

Mexico’s consumer credit card debt in default (defined as 90 days or more of non-payment) is up 53 percent from last year, standing at nearly 27 billion pesos in July, according to Banco de Mexico.

“The criteria for authorizing credit cards has become too relaxed,” explained Manuel Medina Mora, president of Citibank Mexico, which issues 29 percent of all credit cards in Mexico through Banamex.

Medina reported this week that Citibank found 16.2 percent of all credit cards issued by the nation’s six leading banks are currently in default.  Banco de Mexico puts that figure at 6.6 percent, but Medina says the official tally doesn’t include a significant number of accounts canceled by banks for non-payment.

He is especially concerned that high-risk (low income) borrowers are habitually offered high-interest credit cards with little or no background checks, a long-popular strategy of banks to attract new clientele.

In Jalisco, credit card debt in default almost tripled in the last year, jumping from 165 million pesos in May, 2007 to 430 million pesos in the same month this year.

Last month, Jalisco’s Banking Center (CBEJ) announced their lenders agreed to tighten applicant requirements, such as income verification and demonstrable credit history.

“We’re at a good time to correct this default problem.  It is our responsibility in the banking system [to do so], or we’ll be opening ourselves up, not now but in the future, to a less stable economic situation,” said CBEJ President Gregorio Gonzalez Gutierrez.

It is little wonder that Mexicans have racked up more debt than they can pay off.  In the past few years, workers earning as little as 5,000 pesos a month  have been encouraged to charge tens of thousands of pesos on cards with annual interest rates that frequently exceed 40 percent. 

Unable to maintain monthly payments, Mexicans are more frequently taking out home equity loans to pay off credit cards.

“Seventy percent of our home equity loans are used to pay off other bank loans and credit cards,” said Alfredo Muñoz, deputy director of Nacional Monte de Piedad, the government-run pawnbroker and money lender, in a press conference last week.

“I see many cases of clients who owe 100,000 pesos because they have four credit cards and have no way to make payments.  So these loans give them liquidity or allow them to consolidate their debt into one loan at a lower APR.”

Muñoz, whose agency’s home equity loans average 80,000 pesos over three years at 18 percent interest, puts the blame for mounting consumer debt on an immature credit scoring system and irresponsible consumers.

“We should be extending more consumer credit as the economy matures.  But until there is a system that assesses borrowers accurately and holds them accountable, we jeopardize the health of the market as a whole.”