MXP 230 billion), which could indicate a relatively more important role for the new bankruptcy law than what is implied by looking at the number of cases per se.

The legal framework for secured lending has been strengthened considerably since 2000, although its impact on commercial lending growth will take time to materialize. The provision of a security interest is an important prerequisite for most lending transactions, particularly for micro-enterprises as well as small and medium-sized companies (SMEs)<sup>19</sup> . The 2000 Security Interest Package (see Box 1) introduced a new secured lending mechanism (non-possessory pledge on movable property) and regulated security trusts (and their associated out-of-court foreclosure procedures) that had only been intermittently used until then as security interest vehicles. The 2003 reform<sup>20</sup> eliminated some of the problems of the previous law<sup>21</sup> , thereby enabling the two aforementioned instruments to become adopted by banks in secured lending transactions. Anecdotal evidence suggests that the contribution of these reforms to the resurgence in lending has been positive, although business transactions under the new legislation have not yet been fully tested in Mexican courts. As a result, the overall impact and valueadded of these instruments will only become clear over time, particularly during a credit downturn<sup>22</sup> .

Enforcement procedures, public registries of commerce and the judicial system represent the ‘Achilles heel’ of the Mexican credit infrastructure. One of the main objectives of the aforementioned reforms was to accelerate out-of-court settlements and judicial enforcement procedures. However, out-of-court enforcement, as provided by instruments like the security trust, can still be easily challenged by debtors in courts as unconstitutional (“ _amparo_ ” procedure), which slows down the process. In addition, even though litigation experience in the federal district appears to have improved considerably<sup>23</sup> , the quality of enforcement varies greatly across different states (see next section). Finally, although the law provides for the establishment of an electronic public registry of commerce on movable property at the federal level, it is in practice run at the state level. Slow progress has been made to-date in converting registries to electronic access and linking different states, which causes delays in the creation, registration and enforcement of creditor rights<sup>24</sup> . The cost to register a security is also determined at the state or municipal levels and varies substantially (see next section). The combination of

> 19 According to bank commercial loan data in CNBV’s R04C database, the volume of loans that was more than 90 percent covered by collateral as of end-2005 was around 44 percent for micro-enterprises versus only 27 percent for large companies.

> 20 See Baker & McKenzie (June 2003) and Hill F. (2004).

> 21 For example, the 2003 reform eliminated the Barzon or non-recourse clause (which was introduced to protect mortgage debtors from losing their home and still owing money to the bank) that had allowed the uncovered portion of a loan to be extinguished in the event that collateral sale proceeds were insufficient, and clarified the use of security trust agreements that had made them cumbersome and costly for trustees.

22 According to Zuñiga Villaseñor G. (2006), the fast recovery of non-bank sources of finance implies that weak creditor rights is no longer an obstacle for the expansion of bank lending to firms and that other factors are at play.

23 Anecdotal evidence suggests that the length of litigation procedures for collateral foreclosure in the federal district has dropped to an average of 2-3 years, as opposed to 4-6 years prior to the 2000 reform. 24 Anecdotal evidence suggests that the process for registration of a security agreement in the public registry of commerce and property of the federal district might take as long as one year to complete.

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