Economy Ministry sees risk of high default, vicious circle for borrowers
Ronaldo Bento — Foto: José Cruz/Agência Brasil
The offer of payroll-deduction loans for beneficiaries of the cash-transfer program Auxílio Brasil, one bet of President Jair Bolsonaro (Liberal Party, PL) to draw low-income voters, is rejected by the country’s largest private-sector banks and faces resistance within the federal government as well. So far, even medium-sized lenders, which are more reliant on payroll-deduction loans, say they are unlikely to offer them.
In the past two weeks, banks such as Itaú Unibanco, Bradesco, and Santander have said that they will not offer the line because they consider that the target audience of Auxílio Brasil is a vulnerable one. There would be potential risks to the business and damage to their reputation. Sources say that public rejection by these lenders caused concern in the government, which now foresees that the measure will have a smaller scope. Still, there is no intention, for the time being, to postpone the launch of the credit, scheduled for early September.
Before the rejection of large banks, Citizenship Minister Ronaldo Bento advocated the measure and confirmed last week that the launch will not be delayed. He responded to critics by saying that the government’s goal is to “democratize access to formal credit” and that 17 lenders had been approved to work with this type of credit.
The ministry did not reply to several requests since Wednesday to provide this list of banks.
Not even among government officials is there a consensus on the measure. One source said that, after weighing the positive and negative aspects, the Economy Ministry preferred not to participate in the project. “We do not oppose it. We just don’t see great benefits,” the source said. The positive side is that “some people understand” that the measure can represent an exit door, through micro-entrepreneurship, for the program’s beneficiaries. “Someone can buy a popcorn cart and go into business,” he said.
However, the ministry considered that the high risk of default makes the rates too high, with chances of creating a vicious circle. “Families can get very indebted, and the Justice will evaluate, for example, that banks cannot collect the installments,” the source said, adding that something similar “already happens with retirees.” The Economy Ministry declined to comment.
Banks, which were not plaintiffs in the lawsuit, point out that there are many risks, including to their reputation because by offering such a line of credit, people could think that lenders are exploiting those living on the poverty line. There is also a legal risk, as borrowers may go to the courts to undo their contracts, claiming that they need the income for subsistence. Another risk is that of continuity, considering that, in theory, the Auxílio Brasil program will pay R$600 only by December.
Lenders fear the high credit risk, too. Besides not being able to prove other sources of income, beneficiaries of social programs are often underbanked, so banks do not have data on their payment history, for instance. “Credit risk is very high, which means that for the operation to be worthwhile for the bank, it would have to charge a huge interest rate. This is impractical. What if the person loses the benefit? It is very controversial,” a source in the industry says.
Under the new law, those included in the Auxílio Brasil program will be able to borrow up to 40% of the monthly benefit. This means that those who receive R$600 can pay installments of up to R$240 per month. The term is limited to 24 months and there is no limit to the interest rate charged. Valor Investe, Valor’s website for investors, reported last month that ads on the websites of some banks and social media offered loans of R$2,000 and R$2,500 with rates of 5.63% and 5.91% per month – nearly 100% interest per year.
“This is not the right product for a vulnerable audience, so the bank preferred not to offer it,” Itaú CEO Milton Maluhy Filho said in a conference call.
Bradesco CEO Octavio de Lazari Jr. went in the same vein. “It means a very high interest rate, and people will receive the aid for a defined period, so we think it is better not to offer it because we are talking about vulnerable people,” he said. Santander, another large private-sector bank operating in Brazil, said in a note that “it does not offer payroll-deduction loan for beneficiaries of Auxílio Brasil.”
Among the smaller banks, Pan and Agi are also expected to join. State-owned banks Caixa Econômica Federal and Banco do Brasil are expected to offer the line of credit, but are still studying it technically and evaluating risks.
“We are doing an analysis on how it will be implemented. It will be a technical decision,” Banco do Brasil CEO Fausto Ribeiro said in an interview after the release of the quarterly results.
Last Thursday, Caixa’s chief financial officer Rafael Morais told Valor that the bank will offer the line of credit to the beneficiaries of the social program – especially because these people are already its customers – and that it will offer the lowest rates in the market.
When asked about the interest rates charged, he said that this is still under study. “We don’t have any guidance from the President of the Republic. Our decision is extremely technical. We are still waiting for these loans to be regulated, but we expected to participate. We still don’t know what the interest rates will be, and every approval of new products goes through the bank’s governance, through committees,” he said.
Other smaller banks told Valor they are unlikely to join. “We are still thinking about it. We haven’t made a decision. It is a new product. But if I had to say, we are more likely not to offer this product than to offer it,” Banco Inter CEO João Vitor Menin said.
Daycoval has not yet made a definitive decision, but chief investor relations officer Ricardo Gelbaum said that the bank is not very excited about it. “The board and the management team are seeing the movement, but we are not very excited. I don’t see much excitement in the internal discussions of the bank,” he said in a recent interview.
Agi says that the measure represents access to credit for millions of Brazilians who need money for some project or even for basic needs. The bank says it is “an important mechanism for financial inclusion.” Pan, on the other hand, said that it is getting ready for the line of credit. “At the moment, any activity is limited to the discussions about the lines.” The decision to offer the line of credit “is subject to the effective regulation by the authorities and other applicable legal, administrative and operational provisions,” the bank said.
The Brazilian Federation of Banks (Febraban) said in a note that, after the regulation, it is up to each lender to offer or not the line according to its business strategy. “Some large banks have already announced that they will not offer it,” it says. “As with other types of credit, the offer will be evaluated by banks and borrowers in order to prevent over-indebtedness.”
*By Guilherme Pimenta, Álvaro Campos, Estevão Taiar — Brasília, São Paulo
Source: Valor International