OREANDA-NEWS. Mexican banks face hurdles ahead in sustaining growth in commercial lending to micro, small and medium enterprises (SMEs), says Fitch Ratings. As Mexico's interest rates see upward pressure over the medium term, we expect bank competition for SME loans to further intensify and asset performance to modestly weaken.

Government-backed SME loan guarantees that provide first-loss coverage on a significant portion of borrowings have been key to maintaining SME asset quality. This support will have to survive possible expenditure adjustments as part of the Mexican federal government's 2016 analysis and approval process for a balanced budget. Development bank Nacional Financiera is one of the largest suppliers of SME loan guarantees.

SME loan guarantees have helped keep commercial banks' capital requirements and loan loss provisions in check while also encouraging more SME relationships. The guarantees have also helped keep nonperforming loan rates (NPLs) on Mexico's SME loans in the 4%-5% range for several years. As a result, banks have aggressively pursued SME lending and have achieved years of high growth, peaking at nearly 30% per year in 2012, before subsiding to lower double-digit growth levels. Commercial banks have turned to SME lending to offset sluggish growth in other types of loans, such as consumer and mortgages.

An additional hurdle for Mexico's banks is fewer customers within the SME market choosing to take out loans. The number of micro borrowers, for example, has decreased by 12.5% since June 2013 to 224,500 as of June 2015, according to regulatory data. Seeking to sustain SME lending growth, commercial banks will likely aim to increase loan advance amounts. Fitch notes that while the number of SMEs with bank relationships is high, perhaps less than one-third have loans.

Pricing on nongovernment guaranteed loans has reached the same level as guaranteed loans, further reinforcing the competitiveness of SME lending. Overall, rates charged on SME loans declined to 11.34% from 13.74% during the 2009-2014 period, according to central bank data. The decline has coincided with lower reference interest rates and a substantial decrease on NPLs, especially from the micro category.

Fitch counts 35 Mexican commercial banks as active in SME lending, ranging in size from the country's largest banks such as Santander, BBVA Bancomer and Banamex, to small institutions such as Ve por Mas, Afirme and Multiva.