Argentina - The Framework for Secured Transactions and Access to Credit in Agriculture (Vol. 1 of 2) : The Overview and Legal Summary

Document of THE WORLD BANK CONFIDENTIAL 15456-AR VOL. 1 ARGENTINA THE FRAMEWORK FOR SECURED TRANSACTIONS AND ACCESS TO CREDIT IN AGRICULTURE Overview and Legal Summary April 1996 Country Department I FILE COPY Natural Resources, Environment and Rural Poverty Latin America and the'Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Peso (P) P1.00 = US$1.00 US$1.00 = P1.00 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS C6D.CIV. C6digo Civil (Civil Code) C6D.COM. C6digo de Comercio (Commercial Code) PL Law 12962 (pledge law) C6D.PROC.CIV. Y COM. C6digo Procesal Civil y Comercial de la Naci6n (Code of Civil Procedure) C6D.PROC.PEN. C6digo de Procedimiento en Materia Penal de la Naci6n (Criminal Procedure Code) C6D.PEN. C6digo Penal (Penal Code) UCC 9 Article 9 of the Uniform Commercial Code ARGENTINA HOW ITS FRAMEWORK FOR SECURED TRANSACTIONS LIMITS ACCESS TO CREDIT IN AGRICULTURE Overview and Legal Summary' TABLE OF CONTENTS PA&e Executive Summary................................ i Introduction ................................... 1 II. The Importance of Collateral and Problems in the Framework for Secured Transactions .............................. 2 A. The Practical Importance of Collateral ............... 2 B. Problems in the Framework for Secured Transactions ...... 3 III. The Secured Transactions Problem Pervades Argentine Credit ...... 5 IV. Other Explanations ............................... 10 A. Banks Lack Interest in Making Small Loans ........... 10 B. Bank Regulations are Excessively Restrictive ........... 11 C. Insufficient Savings ..........................11 1. The work set out in this paper was undertaken under the supervision of Steven N. Schonberger (LA1ER) and was written by Heywood Fleisig, Economic Advisor to the Private Sector Development Department of the World Bank, and by Nuria A. de la Pefia, attorney and consultant to the Bank. The authors are obliged to Mr. Schonberger and to Jonathan Parker (LA3NR) for their excellent advice on substantive issues, careful mission planning, and close and fruitful liaison with the government. The authors thank Hemant Shah (Peer Reviewer), Alberto Valdes (Peer Reviewer), Jacob Yaron (Peer Reviewer), Rafael Bielsa, Ronald C.C. Cuming, Ulrich Drobnig, Alejandro Garro, Maria Ester Gesino, Lance Girton, Julio Kelly, Boris Kozolchyk, Roberto Laver, Luis Lozano, Graciela Molinelli, Roberto Muguillo, Graciela Rodriguez-Ferrand, Stephen Salant, and J.A. Spanogle for extensive and helpful advice and comment. Many Argentines have generously given their time to explain their perspectives on these problems. The Lead Economist is Danny Leipziger, the Division Chief is Constance Bernard and the Department Director is Gobind T. Nankani. V. Gains to Argentina From Reforming Its Framework for Secured Transactions ................................... 13 A. Efficiency in Allocating Capital ................... 13 B. Equity, Poverty and Access to Credit ............... 14 VI. Overview of the Secured Transactions Problem ............... 15 A. Problems in Creating Security Interests .............. 15 B. Problems in Perfecting Security Interests ........... 16 C. Problems in Enforcing Security Interests ............. 17 VII. Alternatives forReform ............................ 19 MAIN REPORT Executive Summary 1. In the industrial countries of North America, movable property -- property such as livestock, machinery, inventories, standing crops -- accounts for about one-third of the capital stock. There, farmers and other businesses can borrow to finance investment in this capital at interest rates that vary between a few basis points over prime and a few basis points over the mortgage rate; they borrow 70 to 80 percent of the value of the item and put up, as down payment, their capital of 20 to 30 percent. 2. In Argentina, farmers and other business operators cannot secure loans with movable property. Rather, they must finance movable property at much higher interest rates -- the same rates charged for personal -- unsecured -- lending. Or, they must finance this from their own capital, often sacrificing investments with returns as high as the secured lending rate. 3. As a consequence, compared with North America, Argentine farm and business operators pay higher interest rates to finance movable property and receive smaller loans. As a result of this limited access to credit, they use less capital overall and less movable property in their operations. With a better structure for lending, the potential for increasing capital used in farm and business operations might be as much as fifty percent. This limit on the capital stock means that Argentine farmers and business operators, who might have the same wealth and education as their North American counterparts, will produce less and earn less. 4. The inability, in Argentina, to get financing for movable property is not a result of macroeconomic uncertainty, high bank spreads, or bank supervision and regulation. Rather, it arises from problems in the frameworkfor secured transactions in Argentina - - the legal and regulatory system that governs the use of movable property as collateral. 5. In Argentina, with limited exceptions, private lenders will make secured loans to finance the purchase of movable property -- such as farm machinery, industrial equipment, cattle, or inventories -- only if the borrower or his guarantor owns real estate. 6. Argentine lenders are unwilling to secure loans using only movable collateral for several reasons: a They incur high costs when creating such loans. * They face legal provisions that limit the types of property and transactions against which they may make such secured loans. a They are not provided with adequate registries for registering claims against collateral. m They must follow slow and expensive judicial procedures when ii undertaking seizure and sale of collateral. 7. These problems restrict the use of movable property as collateral: a Restrictive laws mean that certain kinds of movable property cannot legally serve as collateral, and so some important lenders and borrowers cannot using such property as collateral with such contracts; consequently, important economic transactions remain outside the scope of the law. " Poor registration systems make lenders unsure about the priorities of their loans. a Slow and expensive collection procedures mean that some movable property, like equipment and livestock, will lose much of its economic value during the collection process and may not cover collection costs. 8. Consequently, private lenders will lend only to borrowers who own real estate. Why? The laws concerning the use of real estate as collateral are well-defined: real estate will typically maintain its value over the collection period; the procedures for registering mortgages work reasonably well; and real estate typically has a high value relative to collection costs. " This reliance on real estate as collateral means that the one quarter of Argentine farmers who own no land have no access to formal credit. Another half of Argentine farmers have difficulty getting formal credit, because they own less than 100 hectares of land, the minimum required by most lenders to qualify for a loan. Small and medium-scale farms and rural businesses, consequently, have only limited access to private credit. a The remaining quarter of Argentine farmers can qualify for credit directly from the formal sector, from either commercial banks or from public banks that apply commercial standards of creditworthiness. These farmers own about three-quarters of the farmland in Argentina. Their average farm contains about 1,400 hectares, almost 50 times more than the 30 hectares owned by the average farmer below the 100 hectare cutoff.' m Inadequacies in the framework for secured transactions affect all sectors, not only agriculture and rural business. They limit access to credit for domestic manufacturing companies and for most small and medium-scale 2 Republica Argentina, Secretaria de Planificaci6n, Instituto Nacional de Estadfstica y Censos, Censo Nacional Agropecuario, 1988, Cuadro 7, p. 53. iii enterprises, and hampers the operations of major multinational firms. 9. These collateral-related problems raise interest rates for equipment loans significantly above what Argentines would pay if they had an efficient system of secured transaction. These higher interest rates discourage Argentines from investing in capital. They produce less than they would under an efficient collateral system. 10. The overview and legal summary describes the nature and importance of collateral-related problems in Argentina, summarizes the legal basis of the problem and examines alternatives for reforming the system of secured lending in Argentina. The main report analyzes the deficiencies in the secured transactions framework and alternatives for addressing those deficiencies in more detail: a It discusses ways of removing legal restrictions that prevent some property from serving as collateral and some borrowers from using movable property to secure loan contracts. " It presents options for modernizing the operation and regulation of the pledge registries to reduce the risks now present in lending against movable goods. m It sets out options for accelerating the seizure and sale of collateral through non-judicial measures. ARGENTINA HOW ITS FRAMEWORK FOR SECURED TRANSACTIONS LIMITS ACCESS TO CREDIT IN AGRICULTURE Overview and Legal Summary I. Introduction 1. Macroeconomic stabilization, sectoral policy reform and trade liberalization have greatly altered the incentives facing agricultural producers in Argentina. To respond to new opportunities and challenges, producers must make large medium-term and long- term investments. Farm machinery, seeds, fertilizer and irrigation equipment are all needed to raise farm productivity, diversify production and increase the value-added to product before it leaves the farm. 2. This adjustment requires financing. Yet farmers and rural business operators in Argentina face severe barriers in obtaining credit. Typically, they can only get credit if they can offer real estate as collateral, show they own real estate that could serve as collateral, or offer the guarantee of someone else who owns real estate. Typically, they cannot get loans to buy movable property -- such as livestock, farm machinery, fertilizer, or pesticides -- secured by that property or by the movable property, such as crops, that those purchases would produce. Nor can they buy much of that property with unsecured credit. 3. In the industrial countries, movable property can amount to a third of the capital stock and half of gross investment. In Argentina, the tension between the immense potential need for movable capital and the inability to finance it places an enormous economic burden on Argentine farmers, business operators, and consumers. 4. This background and legal summary describes how problems in the framework for secured transactions restrict the use of collateral in Argentina and the consequences of those restrictions on the credit system; it considers alternative explanations for the lack of financing for movable property; and it sets out the economic consequences for Argentina of problems in the secured transactions framework. The last two sections of the report provide an overview of the legal, regulatory and institutional problems and set out several strategies to address these problems for consideration by the government, farmers and other members of the business community in Argentina. -2- H. The Importance of Collateral and Problems in the Framework for Secured Transactions A. The Practical Importance of Collateral 5. As a practical matter, collateral is important. In the industrial countries, particularly in North America and the United Kingdom, lenders will typically lend more at lower interest rates when collateral is offered. The amounts lent and the rates charged will differ with different types of collateral. One well known U.S. financial institution, for example, will lend borrowers about six months' pay on their signature alone, about two years' pay on loans secured by movable property such as boats, cars, or recreational vehicles, and about four years' pay on loans secured by real estate. No evidence of ownership of real estate is necessary for the first two loans. Lenders typically charge lower interest rates on loans secured by movable property than they do on signature loans; they usually charge lower interest rates on mortgages than on loans secured by movable property when the length of the loan is similar. Other commercial institutions follow similar practices. 6. In Argentina, like many other Latin American countries, lending follows a different pattern. Most loans from formal sector institutions are secured by a mortgage or by the personal guarantee of someone who owns real estate. This second type of collateral is like a "potential mortgage" -- partly it functions to demonstrate the wealth and creditworthiness of the borrower, partly it raises the prospect that the lender could attach the real estate in the event of a default. Indeed, most bank lending in Argentina is of the latter nature, as well over half of all bank loans have no security. 7. What is missing in Argentina, as compared to systems of secured transactions in industrial countries, is substantial lending that is ultimately secured only by movable property and requires neither that the borrower pledge real estate or own real estate. 8. A flavor of this problem can be seen by comparing bank lending for cars and bank lending for tractors. In Argentina, there are small but growing businesses of leasing automobiles and of selling them on credit. In these transactions, real estate is never pledged and ownership of real estate is not necessary to get the loan. Some banks and automobile dealers are making these loans outside Buenos Aires, in smaller towns. Some of these buyers are residents of rural towns and some are farmers. Yet the very same banks and dealers that will lease or sell automobiles on credit will not sell tractors on credit to the same buyers. As this example indicates, the problem does not arise from inherent limitations of banks or from the inherent creditworthiness of farmers. Rather, it arises from the nature of the collateral: a car is acceptable and a tractor is not. Lenders are rational in making this distinction due to the greater ease, in Argentina, of repossessing and selling the car as compared to the tractor. -3- 9. Such limitations on acceptable collateral can represent an important constraint on credit, because lending secured by movable property can be large. In the United States, for example, lending secured by movable property accounts for about 40% of total credit, and total credit is about twice GDP. In Argentina, lending secured by movable property does not extend much beyond limited lending for automobiles. We will discuss the economic consequence of this later. B. Problems in the Framework for Secured Transactions 10. To understand why Argentine lenders will not accept movable property as collateral or sell equipment on credit, the first step is to ask them. The answer, based on several weeks of mission interviews, invariably, is that such collateral is too risky. This explanation is investigated and the finding is that in Argentina, the framework for secured transactions makes loans guaranteed by moveable property far more risky than in North America or the United Kingdom, where such loans are far more common. 11. It finds this risk at each stage of a secured transaction: o Creation: establishing a security interest in a specific property (collateral) is expensive, cumbersome, and fails to envision instruments to cover transactions of key economic importance o Perfection: those taking security interests cannot be certain of their priority, cannot easily discover whether collateral has already been pledged, and cannot be certain of the legal standing of their own claims o Enforcement: seizure and sale of collateral upon the debtor's default requires lengthy and expensive judicial action which takes far longer than the economic life of much movable property offered as collateral, making the property essentially valueless as collateral. 12. These points are discussed in sections VI and VII and spelled out at length in the main report. The following sections describe how these problems affect different representative parties in the Argentine chain of credit and examine other explanations for the reluctance of financial intermediaries to provide credit secured by moveable property. -4- III. The Secured Transactions Problem Pervades Argentine Credit 13. The Argentine framework for secured transactions limits the ability of formal sector lenders, principally banks, to finance the movable property needs of Argentine farmers and business operators. But the limiting effect is much more pervasive, and extends well beyond the direct financing of farms and businesses by banks. It also limits indirect access to credit by choking off the supply of credit to non-bank potential suppliers of credit. Dealers who might otherwise lend to farmers, for example, find their own access to credit limited by the secured transactions problem. Banks, finance companies, and manufacturers are unwilling to finance a dealer's stock of new and used equipment beyond the credit the dealer could obtain based on real estate holdings. Related problems in the framework for secured transactions make banks and finance companies unwilling to purchase the debt contracts generated by the dealer. 14. This section discusses how these problems affect different representative parties in the Argentine chain of credit, including those who mainly lend (such as banks), those who mainly borrow (such as consumers, farmers and contract grain harvesters (contratistas)), and those who do both. This last group consists of dealers in farm machinery, trucks, and cars; grain elevator operators; international grain merchants (cerealistas); cattle dealers (consignataios de hacienda); farm cooperatives. 15. Private Banks. Private banks in Argentina will not extend credit for movable goods unless the borrower presents evidence of ownership of real estate or a co-signer that can produce such evidence. This evidence may be an original deed or a copy, which the bank retains. Nevertheless, banks appear to attach some weight to the type of movable good offered as collateral. For example, several banks were willing to finance the purchase of cars taking a pledge (prenda con registro) in the car, as long as the borrower presented evidence of real estate ownership. However, no private banks were willing to finance tractors and other equipment with the pledge, even if the borrower showed the same evidence of real estate ownership. 16. Several banks stressed the relative ease of automobile seizure and resale. Unlike farm equipment, all automobiles must be licensed in a legal registry. It is not possible to transfer automobile ownership to a third party without the consent of the secured creditor. Moreover, once a bank has obtained a court order to seize a car that secures a debt in default, the police must treat the car as stolen and must search for it. These conditions make automobiles relatively attractive as collateral and other equipment unsuitable because speed of seizure and sale is crucial. The seller often retains the certificate of title and appears as the owner of the vehicle. 17. In other systems, in some industrial countries, different types of movable equipment serve just as readily as collateral for loans as long as the lender can seize them and sell them quickly; the lender does not demand that the borrower owns real estate. -5- The Argentine credit officers and legal counsels of all major private banks taking the pledge agreed that they would lend more against movable property and would not likely request evidence of ownership of real estate if they had faster seizure and sale procedures. 18. Public Banks. Extensive discussions with the legal staff and credit officers of Banco de la Naci6n and Banco de la Provincia de Buenos Aires revealed views about the adequacy of collateral broadly similar to those held by private bankers. Unlike private banks, these public banks will lend to farmers for tractors and farm equipment if the farmer shows evidence of real estate ownership, but they described substantial difficulties in collecting these loans. They require evidence of real estate because they report that movable goods will probably depreciate in value before seizure and sale. If the loan is secured with real estate, the lender can register a judgment lien against the debtor's property and assure collection even if the sale of real estate takes several months. 19. It is important to note that the public banks, such as Banco Provincia, which lend mostly to farmers in rural areas, do insist on proof of real estate ownership, typically 100 hectares. Thus about 75 percent of Argentine farmers are ineligible for loans from either private banks or public banks because their holdings either are not large enough or are rented. 20. Farmers. Farmers in Argentina cannot pledge their livestock, crops, or equipment to borrow working capital. Nor can they obtain working capital by offering a security interest in a "future" crop under cultivation; nor can they buy livestock or equipment on credit from dealers or banks. If they cannot mortgage land or show evidence of ownership of land without encumbrances, they can get no appreciable credit at all. 21. In Argentina, cattle owned by a farmer operating on rented land are unacceptable collateral to any private bank. In the American state of Kansas, by contrast, cattle are the preferred collateral for bank loans, machinery stands second, and real estate is a poor third. The bank examiners at the Federal Reserve concur in this judgment. Why? Because it is cheap and simple to create a security interest in cattle in Kansas; because lenders can easily defend the priority of their claims with public registries that work well and inexpensively; and because the cattle used to secure a loan in default can be seized within five days. By contrast, in Argentina, it is difficult to create an easily-defended pledge against cattle; registries do not permit easy perfection of claims; and it requires six to twenty-four months to repossess and sell the cattle. 22. Sometimes the difficulties in creating the security interest are crucial. Lending against grain stored in elevators or against cattle in feedlots -- afloating pledge -- is quite common in the United States, but rare in Argentina. Many Argentines interviewed felt that, because of the law's definition of a floating pledge, that device could be used only for specific homogeneous goods not subject to turnover, whereas cattle must be -6- specifically identified' and grain is typically moved in and out of elevators. This normal trade practice requires revolving part of the inventory and makes the floating pledge a risky instrument for bankers. 23. Argentine bankers also hesitate to lend working capital to farmers by taking as collateral the farmer's future crops. The law does not contain provisions on how to foreclose the "pledge against future crops," making this device difficult to implement in court and therefore risky to bankers. 24. Contract Workers. Contract workers (contratistas), who harvest almost a quarter of the grain of Buenos Aires province, sometimes have equity positions in harvesting equipment that exceeds the value of many farms: for example, $1,000,000 worth of machinery, compared to a farm worth $400,000. Yet they typically rent or own parcels under 100 hectares and are unable to obtain loans. In discussions with the Bank mission, they emphasized their inability to borrow for the purchase of used machinery, which raises the cost of entry and expansion. 25. Feedlot and Grain Silo Operators. When intermediaries like feedlot and grain silo operators cannot borrow, they cannot pass credit down the production line to their farmer and rancher customers. They cannot compete with banks and other lenders. However, intermediaries like feed lot and grain silo operators often know much better than banks both their customers and the market for their products. A grain silo operator who extends credit to a farmer will do so with much less risk than will a bank: the grain silo operator will have much more frequent dealings with the farmer and will know which farmers are more likely to pay. Moreover, the grain silo operator will know the grain market well enough to dispose of the farmers collateral with relatively little loss. Small banks cannot afford to have loan officers specialized in each branch of lending; rather, the bank may find it profitable to invest in training a loan officer who can lend "wholesale" to grain silo or feed lot operators, and let the latter deal with farm borrowers. These loans will be larger and more easily monitored. The secured transactions framework in Argentina, however, blocks lending to the farmer by the grain silo operator and blocks the access to credit from banks by the grain silo operator. The same example can be constructed for all other intermediaries in the agricultural marketing chain. 26. Equipment Dealers. Collateral-related problems also indirectly limit credit to farmers. In other countries, equipment sales on credit form a lucrative business. Dealers actively compete with banks to finance equipment sales. They can be important in arranging credit for borrowers that commercial banks cannot reach easily. The equipment dealer, like the feedlot or grain silo operator, has frequent dealings with the customer through servicing the machines. Consequently, the dealer often knows, better 3 The Direcci6n de Registros de Cr6ditos Prendarios has instructed pledge registries to reject filing floating pledges in cattle. -7- than a bank, the customer's reputation and likely performance as a borrower. Dealers also have a natural advantage in seizing collateral, as they know their clients well and have a good understanding of the market for their equipment. A tractor dealer, for example, can more easily seize and sell a tractor than a bank can. Moreover, when the dealer arranges the financing of a sale, the dealer makes a profit from the financing contract as well as the profit from the sale. This additional profit makes smaller loans more attractive to a dealer than to a bank. In the U.S. for example, merchant and dealer credit accounts for over 20% of farm business debt not secured by real estate. 27. But problems in the framework for secured transactions make it difficult for equipment dealers in Argentina to fill this role. The typical equipment dealer in Argentina has a credit line with a bank. For nearly all dealers and banks, the size of this credit line is never more than the firm's real estate holdings; it may be less if cash flow, business prospects, of other debt warrants such a reduction. While banks do accept inventories and accounts receivable as collateral, they reduce the borrower's overall credit line by the amount of the secured loan. Consequently, the dealer's own inventory of new and used equipment does not serve as collateral for additional loans. Nor does the assignment of credit sales to the bank yield loans above the existing credit line. Since the equipment dealer is unable to use inventories or accounts receivable to expand his own access to credit, the sole determinant of his ability to offer credit for equipment sales is his paid-in capital represented by real estate. 28. Dealers also have credit lines with their manufacturers. Manufacturers typically offer a credit line to a dealer based on the dealer's real estate holdings. Manufacturers will directly finance farm equipment purchases only if the ultimate purchaser owns real estate. This leaves the dealer without credit financing for his inventory of used equipment. Accepting used equipment is crucial to selling new equipment, and purchases of used equipment provide important opportunities for smaller and less wealthy farmers. However, the terms for financing are typically quite short -- one or two years -- because the dealer cannot get credit to refinance the used machines sold on credit. 29. This is a quantitatively important problem in Argentina. About 25 percent of Argentina's farmers do not own the land they farm; with limited exceptions, they can obtain no credit at all from private sources on the security of machinery or livestock. Another 50 percent of Argentina's farmers have less than the 100 hectares that most lenders require as the minimum holding to qualify for a bank loan. Sales managers and credit officers at equipment and automobile dealerships stated that they would extend credit against movable goods without a real estate guarantee if they could seize and sell in one or two weeks, as is possible under the U.S. system. Farm equipment dealers estimated that they could expand sales safely and profitably by 25 to 300 percent, even if they had to guarantee the loan. These collateral-related problems also prevent strong links from developing between banks -- the dominant financial institutions in Argentina - - and potential non-bank sources of credit that are better suited to lend to farmers and -8- small and medium-scale enterprises. 30. Retail Businesses. Retail businesses constitute an important part of the credit chain. Hardware stores, seed dealers, and fertilizer suppliers often provide working capital to farmers and small businesses by extending unsecured credit for short periods - - 30 to 180 days. They advance revolving credit to farmers and provide useful financing for the purchase of seeds, fertilizer, and light equipment. 31. The stores give credit in line with the borrower's net worth, income, and repayment history. They would potentially lend more if they could take a security interest in future crops, but legal deficiencies impede the creation of security interests in future goods. These legal obstacles, along with slow and uncertain procedures for the seizure and sale of collateral, limit the use of the growing crop as collateral for borrowed working capital. 32. Retail businesses also have problems in raising credit to finance their own credit sales. In countries with a modem legal framework for security interests, enterprises such as farm supply dealers can refinance their accounts receivable, and with other financial intermediaries they can discount them with banks or finance companies or sell them to factors. This permits them to roll over their capital and extend credit for new purchases by their customers. A farm supply store or equipment dealer can then extend credit to clients that it trusts and intermediate between such small borrowers and larger financial entities that would have no interest in a direct position against the small borrowers that are the clients of the store. 33. Banks and finance companies, which cannot profitably make such small loans, could accept them as receivables "bundled" into a larger block. The larger financial intermediaries could then use these bundled accounts receivable to secure a loan to the retail business or dealer that originally extended credit. Unlike the smaller loans to individual customers, the bundled loan to the store would be large enough to warrant the attention of the bank or the finance company. 34. Retail business in Argentina cannot finance their credit sales using their accounts receivable as collateral. While banks may appear to take the assignment of such documents as collateral, they actually deduct any loan amounts from the enterprises's overall credit line, which is based on its real estate holdings. No additional credit is actually supplied; the documents have no standing in and of themselves as collateral for loans. 35. In other countries, such unsecured, short-term, high interest rate credit lines are usually extended to high-risk borrowers. In the United States, for example, consumer credit cards yielding 19 to 21 percent annually can have non-performance rates as high as 4 to 5 percent. Yet these high interest rate low-performance accounts have a ready market, both to sell and to secure loans. This experience shows that under the right -9- circumstances small loans with poor performance can be an important feature of bank lending. 36. Is this experience generalizable to Argentina? Again, only with difficulty under the present framework for secured transactions. The credit card accounts receivable are themselves personal property against which a lender might take a security interest before extending a loan. As with other personal property, problems with secured transactions in Argentina limit possibilities: it is difficult to create a security interest against credit card account receivables because of the high cost of assigning the accounts; there is no provision for the registration of a security interest in accounts receivables and consequently, no way for the lender to be sure that the accounts receivable have not already been pledged to another lender; finally, it is difficult to enforce the security interest, either by obtaining the right to payment or by selling the portfolio to a business with an interest in maintaining that portfolio. -10- IV. Other Explanations 37. It is easy to show that Argentine farmers and other businessmen cannot get credit secured by movable property. How does one know, though, that this problem arises from the legal and regulatory framework? How does one know that the source doesn't lie elsewhere? This section sets out some of those alternative explanations, discusses their advantages and shortcomings, and relates them to problems in the secured transactions framework. A. Banks Lack Interest in Making Small Loans. 38. Some have asserted that credit is unavailable to farms and small businesses because banks are reluctant to make small loans due to the cost of administering them. Could it be that loans secured by movable property tend to be small and that this, rather than problems with movable property as collateral, explain the failure of banks to lend for movable property? 39. Several difficulties beset this explanation. First, loans for movable property are not, per se, small. Examples abound: the grain harvester of the contratista exceeds the value of most of the houses in the provinces whence the contratistas come; yet banks will lend for the house and not for the harvester. The sugar cane press exceeds the value of farmer's house; banks will lend for the latter and not for the former. The meat in the refrigerated warehouse exceeds the value of the warehouse; banks will lend for the warehouse and not for the meat. 40. Moreover, movable property comprises more than equipment. It includes inventory and intangible personal property, like accounts receivables. As was discussed earlier in the chapter, a bank might not be interested in making a loan for $89.95 for a portable drill for a farmer. But it certainly would be interested in a portfolio of 100,000 such accounts receivable or equivalent credit card debt; or a loan to finance the inventory in a warehouse containing 100,000 such drills. That these loans are commonplace in North America and the United Kingdom and unknown in Argentina arises not from the proclivities of banks but from failings in the framework for secured transactions. 41. Secondly, the credit structure includes far more than banks. It includes non-bank financial intermediaries, like finance companies, factors, pawnshops, and NGO lenders; it includes non-bank non-financial creditors like warehouses, dealers, wholesalers, and feed lot operators. All of these economic agents face problems in giving and getting credit even though, in many cases, their niche in the market exists precisely because they are willing to give small loans. 42. Finally, if "small loans" means loans under $100, it is important to note that in a well-functioning financial system, banks do play a key role in delivering such small -11- loans to small borrowers. They do this both by making small loans directly and by refinancing the loans of other institutions. Banks issue credit cards which provide a low cost means of financing small purchases and refinance these small loans with securitized commercial paper issues that bundle thousands of small loans and refinance them in the commercial paper market. Banks refinance the loans made by countless shops, wholesalers, fertilizer dealers and other enterprises that routinely extend small amounts of unsecured credit to small borrowers. They perform the same function in refinancing the loans extended by finance companies and pawnshops. Sometimes they take direct positions vis a vis these institutions; sometimes they guarantee the commercial paper issues of these institutions. The inability of Argentine banks to play this role arises not from the small size of the ultimate loan. Rather, it follows from the difficulties outlined earlier in using such small accounts as collateral, registering claims against them, and regulating loans made against such collateral. B. Bank Regulations are Excessively Restrictive 43. Some explain the absence of credit for movable property and the insistence on pledging land or giving evidence of land ownership as a result of excessively strict bank supervision and regulation. We found no evidence, however, that private Argentine banks wished to make loans secured only by movable property; rather, except for a few banks making automobile loans they uniformly regarded them as too risky. No bank credit manager or legal counsel stated that the bank would be willing to make such loans if permitted by the Superintendent of Banks. 44. Indeed, Argentine bank regulations treat loans secured by movable property no differently from unsecured loans. Good bank regulations will reflect the legal realities of collection against different types of clients and different types of loan guarantees. The regulatory treatment of movable property that serves as collateral broadly conforms to the reality of debt collection in Argentina. 45. Argentina has only limited opportunities for changing bank regulations without substantially increasing the risk to the banking system unless, at the same time, changes occur in the Argentine legal, regulatory, and institutional framework for secured transactions. . Only changes in that framework will permit changing the banking regulations without raising the risk to the banking system. C. Insufficient Savings. 46. Some have asserted that low savings in Argentina limits the funds available for investment in movable property. Obviously, if those with the investment opportunities in moveable property saved more, then there would be more investment in movable property. 47. But this small truth pales beside the larger one: increasing domestic savings -12- cannot address this issue. Indeed, if domestic savings rose generally, then domestic savers without their own opportunities to invest in movable property would have just as much concern over lending their savings without acceptable guarantees as would the banks who now intermediate these funds. Financial markets improve overall economic efficiency, in part because they transfer claims from savers to investors in ways that allocate society's savings to the investments with the best combination of risk and return. The absence of acceptable collateral in Argentina raises the risk to investments in movable property and makes savers less willing to take these investments. 48. Internal financing of investment is not a very effective solution to financing problems, especially for small farms and businesses. It is particularly difficult for such operators to increase their savings. Consequently, they can self-finance their own investments only at a very slow rate. Even farms and businesses with excellent investment opportunities can take advantage of them only at the rate at which they can accumulate savings. This limits the rate of growth of the economy in a way that bears heavily on the most able operators of farms and businesses who happen not to have wealth that is liquid or embodied in real estate. -13- V. Gains to Argentina From Reforming Its Framework for Secured Transactions 49. The rapid pace of reform in Argentina and the full agenda of future reform leads inescapably to asking how important in the policy agenda is the reform of secured transactions to the government, to the farm community, and to Argentine business in general. A. Efficiency in allocating capital 50. The problems that arise for lenders who might take movable property as collateral mean that lenders regard loans secured by such collateral as no less risky than unsecured loans. This leads lenders to charge higher interest rates for such loans and to reduce the quantity of such loans that they offer. Whereas in North America farms and businesses might face similar interest rates for loans for movable property and real estate, businesses in Argentina face much higher interest rates for movable property. That leads Argentine farm and other business operators to reduce the amount of movable property that they use in the course of dong their business. 51. These problems with undertaking secured transactions affect not only the volume and price of investment, but also its allocation. For landless Argentine farmers and business operators, a credit system linked rigidly to real estate limits development. As a business expands, for example, its sales will increase. This higher volume of business may or may not require more physical space, but it will require larger inventories. If inventory cannot serve as collateral and the business has already borrowed the maximum against its real estate, it must finance this additional inventory out of its own capital. The same business can borrow to expand the size of its physical plant, using the expanded real property as collateral. Diverting investment away from inventory and toward physical plant, however, is less economically valuable than encouraging capital growth in potentially marketable inventory. In agriculture, expanding farm profits often involves increasing yields per acre by using more machines or livestock on a given amount of land. Under such conditions, optimal investment in machines or livestock increases relative to investment in land. However, when machines and livestock cannot serve as collateral and lenders wM extend credit only for more land, farmers have incentives to invest more in land and fixed assets than in potentially more productive livestock and machinery. 52. This, of course, is efficient in the framework of the existing Argentine laws and legal framework. The difficulty is that in North America the same capital will produce more output, because fixed capital and labor are combined with more movable property there. In the United States, rates of interest on loans for a wide array of equipment, cars, and other movable property run 1/2 to 1 percentage point above the mortgage -14- interest rate.4 In the United States, nearly 40 percent of the country's credit is secured exclusively by movable goods. Productivity per worker improves when farms and businesses can profitably hold larger inventories, use movable equipment, and install fixtures. B. Equity, poverty, and access to credit 53. Lack of access to credit affects all Argentines -- even the wealthiest farmers and the most profitable companies in Argentina could gain from innovations that permitted cheaper financing of equipment and inventories. However, the burden of an inadequate framework for secured transactions is felt most heavily by those farmers who work rented land, or who sell their services and do not own land, and by small rural businesses that supply inputs to these farmers. Moreover, other lending agencies, including Non- Governmental Organizations (NGOs), that attempt to make unsecured loans will find that their ability to make loans is vastly constrained. Government programs which seek to improve the access of small-scale entrepreneurs to credit and other input markets have little hope for "graduating" beneficiaries. Limits on secured transactions in Argentina, therefore, restrict access to credit through many channels that might more suitably serve minfindistas and other small businesses in rural and urban areas. 4 See "How Legal Restrictions on Collateral Limit Access to Credit in Bolivia," The World Bank, Report No. 13873-BO (Appendix I: Economic Cost of Deficiencies in Bolivia's Collateral Law, pp. 55 and 56). -15- VI. Summary of the Secured Transactions Problem 54. The limits to securing loans with movable property arise from problems in creating, perfecting and enforcing security interests. This section summarizes those restrictions and options for solution. A more complete discussion appears in the main report. A. Problems in Creating Security Interests 55. In Argentina, several provisions place limitations on who may create a security interest and on what may serve as a security interest. These limits result in excluding important potential rural lenders and creditors and making it difficult to use important farm and rural assets as collateral for loans. 56. Argentine law specifies a list of who may act as a secured creditor. That list excludes most farmers, ranchers, breeders; any non-business rural resident; and any rural business that has not registered in the commercial registry. Anyone not on that list may not take a security interest and, consequently, must make loans without collateral. Except, therefore, for loans with the strongest personal guarantees (relatives, families, acquaintances of many years) all rural savings must be invested with formal sector urban institutions which, as noted above, have their own difficulties in placing loan with farmers and rural businesses. 57. Financing inventories requires security interests that float and continue in proceeds of the collateral. In Argentina, however, security interests require a strict identification of the collateral. Since the law does not permit parties to use a general description of the collateral, the security interest cannot float.s Moreover, security interests continue only in "fruits" and "products" of the original collateral. However, these are more restrictive concepts than proceeds. For example, money obtained from the sale of pledged cattle and subsequently deposited in a bank account would not be subject to the original pledge. Nor would machinery bought with that money. These problems increase the risk of collecting loans secured by inventory and, thereby, reduce the offer of such credit. 58. These and other problems limit creating security interests in accounts receivable. The Argentine system of pledges secured by negotiable instruments is limited. There can be only one creditor against the specified instruments. Nor can the accounts rotate: if the underlying instruments are due in 30 days, the loan must also mature in 30 days. The potential lender against accounts receivables will find satisfactory neither the registered pledge nor the assignment in accounts receivables. Since the law does not s Argentina provides for a floating security interests, but only in 180-days loans secured by fungible goods (like grain, but not cattle). -16- require public registration of all claims in accounts receivable, potential pledgees or assignees have no means of learning if higher ranking claims in the accounts exist. Consequently, they cannot know their priority. 59. As discussed above, dealers who sell on credit and non-bank lenders can be major conduits of credit to farmers and rural businesses. They can provide credit to borrowers who are too small or too remote from banks to be of interest to a bank. However, for them to serve this function, they themselves must have access to credit. Their inability to borrow against their inventories and accounts receivables severely limits their access to credit and their ability to "onlend" to farmers and rural businesses. Options for Solution: * Repeal restrictions and provide for a security interest applicable to all property, creditors, and transactions created for purposes of security. * Allow security interests to float and continue in proceeds. * Rank the priority of creditors against accounts receivable according the date of registration of the claim in a public registry. 60. These revisions would require legislation. Section VII below discusses alternative strategies for introducing these and other changes into Argentine law. B. Problems in Perfecting Security Interests 61. Perfecting security interests refers to ranking and making public claims against collateral. Perfection is crucial in reducing the risk in securing a loan because each lender needs to know whether any prior claim in the collateral exists. For example, the borrower might have agreed to pay another loan first from the proceeds of the sale of the collateral. The priority of a lender is essential information in learning that risk. A $100,000 house might appear to be adequate collateral for a $50,000 loan. But if the house already had a mortgage of $80,000 against it, which would have to be paid before the $50,000 loan, only $20,000 in equity would cover the $50,000 loan. The house would not be adequate collateral. 62. Broadly speaking, two means exist for perfecting claims against collateral: possession and public registration. However, in Argentina, problems limit perfection in each method. The major user of the possessory pledge is the warehouse.' The law restricts both the creation of warehouses and the access to the registries in the 6 For smaller and more risky borrowers, the pawnshop is an important potential creditor using the possessory pledge and perfection by possession. -17- warehouses where the issue of warrants is recorded. For registered pledges, the law sets out expensive and troublesome registration requirements. Problems exist both in registering and in retrieving information from the pledge registries; existing index systems do not permit easy search of the registries. 63. An important obstacle to solution arises from the lack of public access. Argentine registries allow a party to obtain information only for a specific transaction. The public may not directly search records for "all" registered information. This makes it hard to learn the rank of priority and raises the riskiness of lending. Options for Solution: * Lift restrictions for the possessory pledges of warehouse receipts. * Improve the operation of the pledge registries and permit public access. * Limit registration of information to that necessary to be made public; consider a system of notice filing, where only a notice of existence of the claim and not the claim itself would be filed. 64. Improving the public registration system for security interest in movable property would require an economic and a technical evaluation of the many options.' C. Problems in Enforcing Security Interests 65. Based on an investigation of about 400 debt collection cases, it appears that it takes about two years to repossess and sell movable property in Argentina.' The delay in enforcing security interests arises from procedural rules that require frequent and lengthy court involvement in both the seizure and the sale of collateral. The law treats debt collection cases as any other judicially litigated case. The length and frequency of these interventions raise their cost. Moreover, the great length of time means that much movable property depreciates before creditors can seize and sell it. * See Gianluca Bacchiocchi, Astrid Dick, and Gabriel Loeb, Maximizing the Social Surplus Within the Politically-Constrained Argentine Registry System by Increasing Efficiency and Distributional Equity between Registries and Consumers [Processed, The World Bank, 1994] 8 Nuria de la Pefia and Roberto Muguillo, Case Disposition Tune for Seizing and Selling Movable Property in Capital Federal Commercial Courts [Processed, The World Bank, 1995]. -18- Options for Solution: * Introduce more expeditious procedures to seize collateral. Argentines may accelerate seizure of collateral by introducing procedures that do not require judicial litigation. For example, these may include harmless repossession, administrative repossession, receivership and summary procedures for court-ordered seizures. A chapter of a law on secured transactions could include these procedures. * Allow creditors to control the sale of the collateral. Argentine laws could speed up the sale of collateral and lower its costs by providing for a creditor-controlled sale of collateral. These rules could apply uniformly to all creditors, and judicial intervention during the process could be minimal. A chapter of a new law on secured transactions could include these provisions. * Enforce the rank of priority of security interests. The secured transactions laws should clearly establish the priority of secured creditors by listing on a case-by-case basis the different priority rules governing all possible conflicts. These priority rules should apply to all security interests. -19- VII. Alternatives for Reform 66. This paper has discussed many problems in Argentina's current pledge law and other related secured transactions laws, and has explained how changes in those laws would ease access to credit and lead to lower interest rates on loans secured by movable property. The laws needing reform include substantive laws that set out the rights of creditors and debtors and procedural laws that set out how these rights would be enforced. 67. Argentina has a broad range of options for reform: at one extreme, it could entertain piecemeal revision of each element of the law that creates economic problems. At the other extreme, it could entertain a comprehensive reform that would include the creation, perfection, and enforcement of any security interest, including the pledge and any other security devises. What is the most effective and efficient way to introduce such a comprehensive secured transactions framework in Argentina? The "correct" solution will balance, in the view of the Argentine farm, business and legal community, the economic gains to the concerned groups with the legal and procedural difficulties that each option involves. Final determination, therefore, should await consideration of these issues in an open forum where the interested groups can discuss the issues and consider the costs and benefits. This chapter sets out several alternatives for consideration: Option One: Enact piecemeal reforms 68. A piecemeal reform effort would require separate and specific laws to address each problem raised in the discussions of creation, perfection and enforcement. Historically, this is the path that was followed by the United States and Canada. As economic need required it, new and different lending laws were passed to accommodate each transaction. Such a solution has some appeal: the legal change required appears at first to be simple and involve no substantial change in the underlying system. 69. However, these appearances may deceive: the support for a unified general security interest in the United States and Canada grew out of the problems created by a proliferation of special laws. Multiplicity of laws sharply increases the possibility of inconsistency. For lenders, this growing inconsistency raises the prospect of conflicting priorities and enforcement systems that raise the riskiness of the loan. But raising risk defeats the purpose of the reform which, after all, aims to reduce risk and, thereby, increase the flow of credit and reduce interest rates. This is the present situation in Mexico, which may appear, superficially, to have a richer framework for secured transactions than does Argentina but which, in fact, delivers little credit secured by movable property because of the bewildering complexity and lack of certainty that this legal framework provides. -20- 70. 71. As a drafting and logical issue, a general security interest law, such as that existing in North America, resembles an instruction to "include all the numbers between 0 and 1", while the piecemeal solution resembles an instruction to "name all the numbers between 0 and 1". This may seem like a small point, but the difference in principle is large: as a logical matter, it is not possible to "name all the numbers between 0 and 1". Indeed, whatever two numbers are named between zero and one, it will always be possible to name another number between those two numbers. It is in this sense that the specific piecemeal approach to reform will always miss some important economic transactions and lack the completeness made possible by the general security interest. Because of this, the apparent simplicity of the piecemeal reform will, relatively quickly, lead to much greater complexity. In view of this, Argentina may choose to pass over this stage of development and move directly to the more general view of the security interest. Option Two: Enact a special law ILey Especial] for secured transactions that introduces a unified security interest that applies to all transactions and goods and that replaces existing security interests, like the pledge. 72. Under this option, the special law on secured transactions would introduce a unique and unified type of security interest that applies to all transactions and goods and that replaces existing security interests, like the pledge." Several scholars have advocated this approach,10 recommending that Germany and member countries of the ' That has been the case in the United States with the enactment of Article 9 of the Uniform Commercial Code. For a proposal to model the reform in Civil Code systems on U.C.C. Article 9, see Alejandro M. Garro, "Security Interests in Personal Property in Latin America: A Comparison with Article 9 and a Model for Reform," 9 Hous. J. Int'lL. 157 (1987), "Reform and Harmonization," and R.C.C. Cuming, Q.C., "Public Registration of Security Interests in Personal Property: Some Recent Canadian Developments," International Academy of Commercial and Consumer Law Conference, National Autonomous University School of Law, Mexico City, M6xico, June 15, 16, & 17, 1983, Revista de la Facultad de Derecho de M6xico, Tomo XXXV, Enero-Junio de 1985, Ndms. 139-140-141. 1o The United States Commission on International Trade Law authorized the Secretary General to undertake a study for a law on security interest in 1968 [Official Records of the General Assembly, Twenty-Fifth Session, Supplement No. 17 (A/8017), in 1 UNCITRAL Yearbook, Part 2, M, A (1968-1970)]. Professor Ulrich Drobnig of the Max Planck Institute for Foreign and Private International Law completed this study in 1977 [Report of the Secretary-General: Study on security interests (A/CN.9/131), in 8 UNCITRAL Yearbook 171 (1977)]. The study aimed at assessing the feasibility of a uniform law on security interests to help international sales. Drobnig's study, going one step further, recommends a unified law on security interests. It also points out the importance and magnitude of the restrictions on collateral in various civil law countries and how U.C.C. art. 9 has lifted such restrictions. The UNCITRAL study, however, did not specifically link the restrictions on collateral with economics (issues such as access to credit were not considered). In 1979, the Secretary General submitted to the Commission a report on the feasibility of uniform rules on security interests and on their possible content [Report of the Secretary-General: Security interests; feasibility of uniform rules to be used in the financing of trade, 10 UNCITRAL Yearbook, para 6. at p. 81 (A/CN.9/165), 1979]. At this time, the Commission concluded that "...the subject matter of security interests is of sufficient importance for it to continue work in respect of it. The importance derives from the fact that, while the use of security interests is an important means of financing commercial -21- EEC adopt Article 9 of the U.S. Uniform Commercial Code, after technical adaptation of the main features of the article." This approach introduces a new word for naming the new security interest: "charge" or "security interest" (garantia real). This new security interest is then defined as a general, uniform concept that embraces all types of security interests. This option has the advantage of avoiding confusions between the old rules and the new ones. Option Three: Introduce a special law [Ley Especial] for a new type of security interest without changing the current laws. 73. Another option is to leave other existing security devices and introduce a new comprehensive security interest. However, this special law should make its rules regarding perfection and priority applicable to the other existing security devises. Otherwise, a conflict will result regarding the priority position of the different creditors. The apparent "gradualism" of this approach, however, is deceptive: the need for consistency would require overruling so many provisions in the existing security interest laws, like the pledge, that the option becomes very similar to the one above. Option Four: Introduce a special non-possessory pledge law that replaces the existing ones. 74. Under this option, Argentina would amend the pledge law to create a unified security interest, as in option one, but would call it a pledge instead of a security interest. The law should (i) give to this pledge the qualities described in this report (floating, continuation in proceeds, after-acquired property, etc.);12 and (ii) make transactions, the law in most States is rudimentary and as such is not appropriate to respond to the needs of modem commerce." However, UNCITRAL did not continue this work. It was suggested that the Commission await the conclusion of other studies before undertaking further work on its own. " In Germany and other member countries of the European Economic Community it is possible to adopt a statute, modeled to Article 9 of the U.C.C. because the pattern of secured financing in the receiving countries is similar to that underlying the code. However, the diversities in drafting techniques, in concepts, in the general structure of the legal systems are too great to permit a reception tel quel. See Ulrich Drobnig, "Is Article 9 of the Uniform Commercial Code Exportable? A German View," "Aspects of Comparative Commercial Law: Sales, Consumer Credit, and Secured Transactions," McGill University, Montreal, Oceana Publications Inc., Dobbs Ferry, N.Y. (1969). 12 The proposed changes in the framework of secured transaction were modeled in Article 9 of the U.C.C. It is possible to adopt in a civil law country a statute modeled to Article 9. The State of Louisiana (United States) and the Province of Quebec (Canada) have done so. In the Province of Quebec, the idea was not well seen at first, and several criticisms were raised. It was regarded as politically impossible to adopt Article 9 claiming that many provisions did not mesh with civil law concepts as developed in Quebec; that judicially it would not be feasible to adopt it because it contains language which is too technical in the sense that it reflects current usage in the United States which judges in Quebec would not be able to apply effectively; that the structure and the legislative method of drafting as well as the fact that it is considered more a code than a restatement are other objections. It was said to be so complex that only lawyers could use it. "... The lack of simplicity as to what is needed to create, perfect and execute a security interest -22- priority, perfection, and enforcement rules applicable to any other security devises (like financial leasing and conditional sales). 75. This option has the desirable feature that it continues the use of the term prenda" with which the Argentines are familiar. To a degree, this was the strategy followed in Quebec, which reconciled its civil code provisions with those of common law Canada by greatly expanding and redesigning the traditional hypothec. However, this approach has the disadvantage that some may be confused when the traditionally known characteristics of the pledge would no longer be valid." Also, Argentines may confuse the application of the new pledge rules with old concepts, thus diminishing and frustrating the public policy followed in the new law. However, this risk could be minimized by making clear descriptions and distinctions of concepts and by not leaving gaps that would require using old concepts. 76. Over and above these main options, some general points merit consideration by Argentine policymakers and by the farm and business community: * Undertake the reform in one stage, by drafting a special statute on secured transactions and by, in that same statute, assigning to a private group the task of continuing revision and adaptation. 77. If the options for legal changes set out in this report are adopted, it would be useful if they were embodied in one separate specific statute, and not one that corresponds to a chapter in the Commercial or the Civil Codes. Such a special law permits further revisions and amendments without having to undertake a major restructuring of the codes. This approach proved successful when Argentina enacted the pledge law. 78. Also, the establishment of a new secured transactions framework would be easier if undertaken in one continuous stage. Multi-staged drafting would not work well for improving access to credit because many of the recommended legal features do not work without the others. As such, the proposed changes are interlinked. For example, introducing in a first stage a security interest that applies to all movable goods but that leaves intangibles for a second stage would not improve lending for equipment. Even when it would seem that a dealer would finance sales of equipment, the dealer would be unable to finance that sale with the chattel paper that his sales generate. Consequently, makes it difficult for courts to know how to apply it." See Renell M. Zoellner, "UCC Article Nine and Secured Transactions in Canada and Civil law Jurisdictions," Chitry's Law Journal, Vol. 29:260, October 1981. Despite these early criticisms, however, Quebec adopted rules modeled to Article 9. 13 "Hipoteca" may be confusing, since it may apply to both movable and immovable property. 14 This occurred in the United States, where drafters opted for a new general term - security interest (garantia real) - instead of using the name of an existing type of security interest, like the chattel mortgage (hipoteca mueble). -23- the dealer would be unable to get credit for his sales and would not sell more equipment on credit, except for what he can already sell with bank financing based on his real estate - the problem that we are trying to avoid. 79. For future adjustments of the statute, in the same stage, the statute should assign to an interested private group the duty of continuing revision and adaptation. Specific issues of priority could then be ironed out in subsequent stages." * Train lawyers and judges in the new framework and its importance in expanding access to credit 80. The commercial chambers and pledge registries, as major interested parties in the reform, should lead the instruction in the new techniques of legal counselors, bench and bar at large, and any of those who will use and apply the legal tools placed at their disposal. It is necessary to train lawyers and judges on the new concepts, like cuentas por cobrar, rights in the collateral, or continuation in proceeds of collateral, so that they apply them correctly and enforce the law in a way consistent with the underlying public policy objectives. * Help consumers and small commercial users - simple drafting 81. The drafting policy should emphasize simplification, providing a readily usable statutory framework, and using terse legal Spanish and civilian terminology. This would lower the cost of using it by the farm and business community. Suggestions of forms and model contracts, perhaps incorporated into the law, would facilitate its understanding and use by non-lawyers. For most businesses, a simple statute will reduce the costs of securing lending with movable goods. * Registry Reform follows Legal Reform 82. Several reforms of registry regulation would permit the Argentine registry system to better serve the public interest". The vast expansion of business that will take place after the enactment of the law would require an expansion of registry features and a modernization of the way they operate. Since the new law will define how the registries operate, attempts to modernize the registries without considering the appropriate legal reform is unlikely to result in wise investment in registry equipment. The precise method of data retrieval and, consequently, the type of hardware and indexing software requires prior definition under the law. 15 However, consensus should be reached for purchase money lenders and be incorporated in the draft at the beginning. 16 See Gianluca Bacchiocchi, Astrid Dick, and Gabriel Loeb, Maximizing the Social Surplus Within the Politically-Constrained Argentine Registry System by Increasing Efficiency and Distributional Equity between Registries and Consumers [Processed, The World Bank, 1994]