UPDATE 2-Mexico urges banks to keep lending amid US meltdown

(Adds background on remittances)

By Noel Randewich

MEXICO CITY, Oct 1 (Reuters) - Mexico's government urged banks on Wednesday to keep lending, despite a worrying rise in consumer credit defaults and a crisis on Wall Street that has led to a surge in risk aversion around the world.

Leading Mexican banks, owned by big international players like Citigroup (C.N), BBVA (BBVA.MC) and HSBC (HSBA.L), expanded private lending by as much as 50 percent a year in 2005 and 2006, but have since trimmed expansion to about 11 percent annually.

Guillermo Zamarripa, head of the finance ministry's bank department, said outstanding loans in Mexico remain low compared to other Latin American countries and urged lenders to keep credit flowing despite the U.S. meltdown.

"It's very important that financing not stop in infrastructure, in housing, in productive activities, that companies keep receiving the working capital they need to continue production," Zamarripa said told finance executives at an event.

The U.S. economy is in the midst of its worst crisis since the Great Depression as banks saddled with dubious subprime mortgage loans struggle to stay afloat.

In Mexico, risk aversion has increased less than in other countries affected by the U.S. credit crunch, Enrique Castillo, the head of Mexico's banking association, told reporters.

But the financial crisis will still affect Mexico's economy, he warned.

"We would expect the credit dynamic for the year ahead to be of a lesser rhythm than we've experienced in the last few years," Castillo said.

MEXICANS SEND LESS MONEY HOME

A slower U.S. economy also means less money sent home from Mexican migrants working in the United States, and will also hurt exports and tourism.

Money transfers from Mexicans working abroad dropped at their fastest pace in August since the central bank began tracking them in 1995, off 12.2 percent compared with the same month a year ago, the central bank said on Wednesday.

The economy in Mexico, which sends around 80 percent of its exports to the United States, is expected to grow 2.3 percent this year, down from 3.2 percent in 2007.

Mexico's banks have largely avoided turmoil from the credit crisis since their focus has been on traditional lending, not dabbling in risky subprime niches or unpredictable derivatives.

But in recent months, banks have become more careful about handing out new credit cards and consumer loans, sectors increasingly affected by nonperforming loans.

Lending to the private sector is equivalent to about a quarter of Mexico's gross domestic product, low compared to Latin American countries like Chile, where it totals about 75 percent of GDP.

"Despite the current situation, there's still a lot of growth potential in Mexico's financial sector in terms of lending to families and companies," Zamarripa said.

Fears the U.S. credit crisis could deepen and stall economic growth in Mexico have slammed local markets, slicing 10 percent off the value of the peso MEX01 MXN= since the beginning of August.

The government has said Mexico's banks -- devastated by their own crisis in the mid-1990s -- are well-capitalized and able to withstand the troubles on Wall Street.