The new Nafin: Mexico's state development bank redefines its role under new leadership. (Spotlight).

The winds of change are blowing through Nacional Financiera (Nafin), Mexico's largest state development bank, in a reconfiguration bank officials say will help catalyze growth for downtrodden small- and medium-sized companies.

Shedding its image as a refuge for political friends of the government, Nafin General Director Mario Laborin is working hard to bring a new level of professionalism to the bank. He's rebuilding ties with commercial banks and is zapping bureaucracy with the tools of the electronic age.

Although appointed by one--President Vicente Fox--Laborin is no politician. A plain speaker from the northern state of Sonora, Laborin is a veteran of Mexican banking and corporate finance. Laborin's aim is to return development banking to one of its true vocations: helping small- and medium-sized companies by linking them up with big business and government.

"Development banking is now more focused," he said in a recent interview with local press. "In the past, much time was devoted to restructuring--putting the pieces back together. Attention to companies was neglected."

Nafin last August launched a program aimed at improving liquidity for small-scale companies that supply goods and services to large corporations, such as Wal-Mart de Mexico and Grupo Bimbo, or to entities like municipalities, states and federal government. Often, suppliers are left holding a sales invoice long before a cash payment arrives. In theory, suppliers can redeem the invoice by selling it at a discount to a first-floor bank, such as BBVA-Bancomer. But commercial banks haven't wanted the business because of the comparatively high costs of dealing with small firms.

For a cash-strapped small company, the time it takes to turn receivables into cash can make a difference between survival and bankruptcy. Nafin's Supplier Development Program helps accelerate the cash flow cycle by letting small suppliers factor their accounts receivable invoices speedily over the Internet.

Nafin compiles an online database of invoices pending collection that is accessible by the holder of the receivable and the prospective factor. The website matches invoice holders with purchasers willing to accept the right to recover payment against the government or cot poration. Nafin charges small companies low interest rate of about 1% per month. The purchaser becomes the beneficiary of the discounted invoice and attempts to recover at face value.

Paperwork vanishes and costs are reduced so drastically that transactions under US$500 become profitable. Nafin claims to have turned over more than US$500 million during the nine-month old program.

"We made a promise to attend to 70,000 companies in 2001; we ended the year serving 90,000," Alberto Urquiza, director of the supplier development program, told BUSINESS MEXICO. "We plan to serve at least 200,000 this year."

"The concept is easy to understand, but difficult to implement," Urquiza says. "More needs to be done to persuade large companies to adapt their internal payment systems to the program."

A complementary program is helping small business win contracts with Mexico's federal government. The government publishes a biweekly list of the goods and services it plans to buy on Compranet, a website run by Secodam, the Federal Comptroller's Office. Nafin sends e-mails to some 26,000 companies telling them what tenders are on offer in which government department. The bank offers a telephone hotline and orientation courses for beginners.

EMPLOYMENT GROWTH

Nafin's efforts are starting to win praise from analysts.

"It definitely has the correct focus," says Gustavo Lope Cortes, an analyst at Fitch Ratings in New York. "The fact that Nafin is focusing its efforts on helping this important sector of the economy has to be viewed positively."

Philip Guarco, vice president/senior credit officer with Moody's Investors Service, agrees.

"It's just something they have to do because of the structural change in the banking system," he says.

Commercial banks were badly scalded by the 1994-95 peso devaluation. Interest rates hit triple digits in the aftermath, causing a massive wave of loan defaults. Amid the financial turmoil, many local banks disappeared or were swallowed up by multinational banks that were much less willing to lend to small businesses, Guarco recalls.

"The government was scared because there was no one to lend to that sector anymore," he says. "So Nafin's focus on the middle market is absolutely appropriate."

"Real employment growth comes from small- and medium-sized companies. Bringing in foreign capital is good, but foreign, capital-intensive industries provide comparatively less employment than a local, home-grown industry," says Guarco.

LOSING Focus

Nafin hasn't always been so business friendly. For the past three decades--hamstrung by bureaucracy, corruption and recurring financial crises--Nafin failed to live up to its founding vision, analysts and political commentators say.

During the roaring 1950s and 1960s, when Mexico's annual economic growth rate averaged over 6%, Nafin financed the government's import substitution strategy. The idea was that the development bank would help reduce the nation's growing trade deficit by developing "Made-In-Mexico" products for domestic and export markets.

As Mexico's post-war economic model began to unravel at the end of the 1960s, under the pressure of ballooning public-sector deficits and chronic trade imbalances, the development banking sector also started to lose the plot.

Economic good sense was frequently subordinated to political objectives under the administrations of Luis Echeverria (1970-76) and Jose Lopez Portillo (1976-82). That's when the rot really set in, for Nafin in particular, says Samuel Garcia, a columnist for Mexico City daily Reforma newspaper.

"The PRI (Insitutional) Revolutionary Party) government started to use Nafin as a political-electoral vehicle at the end of the 1960s, and in a very clear and evident way during the Portillo government, "he told BUSINESS MEXICO. "The history of Nafin has long been tarnished by this political component."

BIG BUDGETS, BLOATED PAYROLLS

By the late 1970s, the nation's largest development bank had become a byword for bureaucracy.

"Nafin was the bank all the bureaucrats wanted to work for because it paid the best salaries," says Garcia.

"It had huge, overstaffed offices. Nafin's budget was larger than some ministries of state."

There was thus a strong temptation for the government to milk the bank at election time.

"The problem with the state development banks is that they're not driven by the market, and if you're not driven by the market, there are opportunities for corruption, like providing loans to friends," says Moody's Guarco.

Nafin's nadir came during the administration of former Mexican President Carlos Salinas (1988-1994). Millions of dollars of Nafin funds were diverted to popular savings banks, or cajas de ahorro.

"They received Nafin loans that were never repaid," recalls Garcia. "It's assumed that the funds went on electoral campaigns or to develop private companies associated with the directors of the cajas de ahorro."

The government spent more than US$400 million to clean up Nafin's books and has set up a fund at the bank to compensate 210,000 private savers defrauded by the cajas de ahorro.

Mexico's stop-start economic development during the 1980s and 1990s only compounded existing problems of graft and inefficiency at the development banks and made long-term strategic partnerships with the small business sector nearly impossible, Garcia says.

A NEW HOPE

The defeat of the PRI in the July 2000 presidential election at the hands of the National Action Party's Vicente Fox brought with it the promise of real accountability.

"The political change is helping development banks' operations have a more transparent character," says Garcia.

The PRI opposition in Congress now closely monitors their activities. Politically independent advisors staff Nafin's board. Financial statements are published and externally audited. Nafin's payroll has been reduced by 45% since December 2001.

There's no more lending to friends. Credit policies at Nafin are now "quite rigorous," says Guarco. "They're almost too inflexible."

Much remains to be done regarding supply-chain development that Nafin can't do alone, say industry leaders. "Supply chains in Mexico are tremendously fractured," says Yiedckol Polevnsky, president of the nation's manufacturers' chamber (Canacintra). "Canacintra, the Economy Secretariat and Nafin must seek to reestablish these supply chains through a much more ambitious program."

But for the moment, Mario Laborin gets a firm thumbs up.

Andrew Watson is a freelance writer and a finance reporter far a Mexico City daily.