Participants in the sector say changes are needed to make this type of financing take off
08/03/2022
Microcredit grew 53.1% in the pandemic – more than credit in general, which advanced 38.1% – and surpassed the R$10 billion threshold for the first time.
With dozens of millions of informal microentrepreneurs without income due to the restrictions imposed by the coronavirus pandemic, demand has skyrocketed, although banks have somewhat restricted the supply of the modality due to fears of default.
Even so, participants in the sector say changes are needed to make this type of financing take off, including in regulation, and that there are historical and cultural barriers. Microloans account for only 0.2% of the total volume of credit in the financial system.
The 53.1% expansion took place between February 2019 and April this year, the most recent data from the Central Bank show.
Microcredit is not simply a low-value loan. The concept involves a number of factors, especially proximity to the customer – including financial orientation – and the provision of collaterals. As this credit is aimed at low-income people – some of which does not have bank accounts – the collateral is usually a guarantor, or the so-called solidarity groups. These are groups created to honor a debt when one member fails to pay.
The largest microcredit operator in Brazil is Banco do Nordeste (BNB), with a portfolio of R$7.3 billion. Next comes Santander, with R$2.2 billion, considering loans included in the National Program for Productive-Oriented Microcredit (PNMPO). According to the rules, banks must set aside 2% of cash deposits for oriented microcredit. The vast majority of banks do not meet this target and end up transferring their quotas to other lenders or leaving the funds at the Central Bank, without any remuneration.
The problem is that it is expensive to operate in the microcredit segment. As it is necessary to make on-site visits and to be very close to the client, banks have to hire credit officers. BNB alone has an army of more than 3,300 officers, while Santander has 1,600. As the average ticket is low, close to R$3,000, the average term is about seven months and the interest rate must be of up to 4% a month, it takes time to assemble a considerable portfolio and banks prefer to invest in lines with better margins.
In recent years, the government and Central Bank have discussed several changes to try and boost microcredit, such as raising funding to 3% of cash deposits from 2%, punishing banks that do not meet their quotas, establishing a system of shared guarantees, facilitating portability, and establishing clearer rules for the Civil Society Organizations of Public Interest (Oscip) that operate the programs on behalf of the banks. Some measures were partially included in provisional measures, but, besides the fact that they did not meet the sector’s demands, they lost their validity.
Today, the microcredit limit is R$21,000 per client in the same lender, and R$80,000 considering all their credits.
In the pandemic, the government even eased the rules about face-to-face visits to customers, allowing this relationship to be made by digital means. However, as the close link is key in microcredit, in some situations, especially during the initial credit analysis, face-to-face visits are still necessary.
Aliança Empreendedora, an organization focused on supporting microentrepreneurs in situations of economic vulnerability, especially women, says it is discussing with the Central Bank the regulation of the destination of PNMPO funds.
The organization proposes that the portion of the deposits that remains idle be more easily directed to other players operating in this market, such as Oscips. “There is money sitting idle that could be invested in the institutions that already operate at the end and that have a hard time raising funds at a fair price. Banks would then stop paying fines and could even receive some return,” says Lina Useche, cofounder of Aliança Empreendedora.
The organization has already had meetings with Central Bank President Roberto Campos Neto and other members of the monetary authority, who showed interest in the proposed regulation and are open to creating a working group to discuss the topic, she said. There have also been conversations with the Economy Ministry.
“Microcredit can be a great business, but it is costly to make it happen. It has a high operational cost, and it has to have a large scale to be profitable,” Ms. Useche says, adding that, for this reason, the operation with Oscips may end up being more interesting for those who already work more directly with microentrepreneurs, and not for large institutions.
On another front, Aliança Empreendedora has just launched a platform that brings together microcredit proposals. This hub is still in the testing phase and, for now, includes four aggregated institutions and 1,000 users. A new stage is expected to begin in September, with the inclusion of more providers.
Maurício de Almeida Prado, executive director of Plano CDE, a research and impact evaluation company specializing in lower-class families, explains that among the factors that hinder the release of funds for microcredit is the fact that the segment is usually separated from others of the bank.
In other words, the microcredit officer, which works offering this credit to the client, is not the same person who offers other credit products – the bank manager. “We have already done research on microcredit in all the large banks, and the area is somewhat separated; the lenders still haven’t managed to combine both things.” He added that, despite this backdrop, he notices a greater interest from banks to grow in this segment.
The classic microcredit, with proximity to the client and the possibility of a group guarantee, was created by Bangladeshi economist Muhammad Yunus – who received later the Nobel Prize for this work. Lauro Gonzalez, coordinator of the Center for Microfinance and Financial Inclusion Studies at FGV/EAESP, says that the financial system and technology have advanced a lot since then and, in this sense, he believes that visits to borrowers no longer need to be compulsorily face-to-face. “There is the possibility of discussing new technologies that can contribute to improving this proximity.”
Even so, he says that there is no definitive solution to eliminate all the obstacles to the growth of microcredit in Brazil. For him, it might not even be necessary to set aside 2% of cash deposits if state-owned banks like Caixa Econômica Federal operated with classical microcredit. Open banking, he says, is one innovation that can help unlock this type of line. “Even so, microcredit is only one part of microfinance. It is one more mechanism that, along with several other things, can be used. But that’s not what will lift a nation out of poverty,” he says.
While the group guarantee is very strong in the Northeast, where the BNB operates, it is almost non-existent in the Southeast and South regions. Isabel Baggio, head of the Brazilian Association of Microcredit and Microfinance Operating Entities (ABCred), says there is a cultural issue and the people from these regions do not feel comfortable with solidarity lending. She also runs Banco da Família, an Oscip that has helped more than 341,000 people in the South region. “Solidarity lending is not working here. We have insisted on it for a long time, but people don’t feel comfortable acting as a guarantor of others.”
Mr. Gonzalez also explains that there are some historical factors for microcredit never having really reached a substantial slice of credit in Brazil. First, because we are a middle-income country, not as low as Bangladesh and other places where this line has expanded. Second, with the history of high interest rates and spreads, banks have always been able to find very attractive margins in other segments, thus trying to leave the lower classes aside. “Regulation, by earmarking funds, may also have been a shot in the foot, scaring away some lenders, which preferred not to take part,” he says.
*By Álvaro Campos, Mariana Ribeiro — São Paulo
Source: Valor International