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Why, even with more than BRL 1 trillion in measures from the Central Bank, credit is not reaching Brazilian companies?

The old Brazilian bureaucracy and the fear of default may be preventing money from reaching the hands of those who need it most

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Even before the new coronavirus arrived in Brazil, the country’s Central Bank was already acting to increase liquidity in the financial market. In one of the live videoconferences promoted by XP Investimentos during this period of crisis, Central Bank President Roberto Campos Neto said that the country was the first among the emerging countries to act in this regard. With a set of measures capable of injecting BRL 1 trillion ($173,2 billion) in liquidity, the cost of raising funds got lower, and banks have more cash released to lend. But the old Brazilian bureaucracy and the fear of default may be preventing money from reaching the hands of those who need it most: small and medium-sized companies.

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“The truth is that nothing will be enough to compensate (the impact of COVID-19). We are living in an unprecedented moment. The good news is that it will pass. What all organizations need to do is survive this storm. Any help in that sense it will not be as good as if there was no storm, but it is fundamental “, said professor David Kallas, director of the Center for Business Studies at Insper, to LABS.

What the Brazilian Central Bank has done so far

Well, the list of measures is long. “At the turn of February to March, the monetary authority made a large injection of reserve requirements (which included a reduction in the minimum reserve requirement ratio from 31% to 25%). It was the first Central Bank in the world to make a large liquidity measure (so soon when it comes to the pandemic), of BRL 136 billion,” said Campos Neto. 

Subsequently, the Central Bank exempted financial institutions from making additional provisions for performing loans that are refinanced up to September 2020 (six months). “What does that mean? Usually when you have a more complicated debtor and you have to roll over this debt, you have to have an additional provision because the credit is of worse quality. What we did was to waive that provision for six months. The banks (in turn) did (the debt rollover) for two months and may do it for two more,” explained Campos Neto. Since the measure facilitates refinancing performing loans of corporates and households with sound financial capacity, it enables their cash flow adjustments and may mitigate Covid-19 economic impacts, favoring the reallocation of something around BRL 3.2 trillion in credit. 

The Brazilian Central Bank also reduced the capital requirement of banks (the so-called  Capital Conservation Buffer) from 2.5% to 1.25% for a period of up to one year, with a gradual reversal until March 2022. This helps to maintain the current flow of credit, facilitates renegotiations, and increases the capital slack in the National Financial System to BRL 56 billion. In other words, it creates room for credit supply expansion of approximately BRL 640 billion.

In its second round of measures, the Central Bank created a new term deposit with special guarantees, an alternative fundraising instrument for all financial institutions associated with the Credit Guarantee Fund (FGC). That means that the institutions will be able to take higher deposits guaranteed by the FGC, up to one time its net worth limited to BRL 2 billion. “Without being too technical, this helps mostly the smaller banks, allowing a credit expansion of around BRL 200 billion”.

In parallel, the National Monetary Council (CMN) also approved a BRL 650 billion temporary line of loans from the Central Bank to banks in general, backed by Financial Letters guaranteed by credit operations. Accordingly, the money has to return to the Central Bank in up to a year. Besides that, there was still an additional reduction in the minimum reserve requirement ratio, from 25% to 17%.

READ ALSO: Brazilians get payroll deductions to settle other debts, shows survey

Overall, all measures already taken by the Central Bank add up to more than BRL 1.1 trillion in liquidity, or 16% of Brazil’s GDP–the largest set of measures among emerging countries, according to Campos Neto. In the 2008 financial crisis, the measures taken at that time totaled BRL 117 billion, equivalent to 3.5% of the country’s GDP.

In addition to all these indirect measures by the Central Bank, there were also direct measures to help companies in the country, including the BRL 55 billion in emergency credit lines coordinated by the National Bank for Economic and Social Development (BNDES).

Within this BNDES package, the two most important initiatives are the BNDES Small Business Credit line (with BRL 5 billion available to help micro, small and medium-sized companies that need to increase working capital), and the Emergency Employment Support Program, with BRL 40 billion available (BRL 34 billion from the National Treasury) so that small and medium-sized companies that need to reduce wages and working hours of their staffs for up to two months have cheaper financing to do this at this time of crisis.

Is the money stuck in the banks?

On the one hand, some of the available data show that there is a growth in the granting of credit to companies in the country and that the lines launched due to the pandemic are moving, albeit at a slower pace than expected by specialists. On the other hand, there are complaints, which come via entities such as the Brazilian Support Service for micro and small companies Sebrae and the Brazilian Association of Electronic Commerce (Abcomm), that the requests of businessmen are mostly being denied, or that the conditions offered are worse than before the crisis.

In order to identify which credit lines were created or reinforced by the banks due to the pandemic, and after the measures taken by the Central Bank, we would have to seek each of the institutions. To simplify this process LABS asked the bank federation, Febraban for some data. The information sent to LABS is that, between March and April of 2019 and the pandemic period (March 16th to April 30th), there was a 75.5% growth in new non-earmarked loans granted to companies, from BRL 230 billion to BRL 322.9 billion. As they are heterogeneous periods, the comparison considered, according to the entity, the average number of concessions per business day for each period.

Data from the Central Bank itself, considering the weeks of April, also show growth, compared to the same period last year, of 13.5% new non-earmarked loans granted to people, and 34.2% in the amount granted to companies.

In early April, a letter written by a number of entities and sent to Febraban and the Ministry of Economy reported that not only were loan applications being denied but that it was also more expensive to lend. In fact, a survey by Sebrae that will have a new round in the first half of May, showed that almost 60% of small Brazilian entrepreneurs had their loan applications denied.

In relation to direct measures, data updated on Monday by the BNDES show that while the working capital line has already lent 40% of the expected amount, the payroll support program has not yet moved even 4% (or BRL 1.463 billion) of the expected BRL 40 billion amount.

The payroll financing program was presented to the Brazilian business community on April 8th. Since then,14 financial institutions have joined the program, including the five largest banks in the country: Banco do Brasil, Bradesco, Caixa Econômica Federal, Itaú, and Santander

It may be necessary to wait for the new survey by Sebrae to find out if the increases in new free-use loans reported by the Central Bank and Febraban are already changing the perception of small business owners up there, and if they are finally having access to good conditions at this time. difficult.

In times of crisis, interest rates tend to rise because the risk of operations for banks increases. As a result, the remuneration charged by the institutions also tends to increase. Even if to some extent the government, through the National Treasury and the BNDES, assumes part of the risk, it still seems to be high. 

Two weeks ago, a Provisional Measure issued by the Executive released the banks from a series of requirements to effectively lend the money to companies, including the presentation of federal tax discharge certificates. This measure, according to experts, is fundamental since, unlike the federal government, state and municipal governments have not yet determined clear policies for exemption, postponement, or installments of taxes and fees.

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“The federal government was very quick in relation to the income tax and other federal taxes (on the extension of deadlines, installments, etc.). Now the state and municipal governments, it is a shame what they are doing. They have none public policy in this sense. They are simply ignoring that there is a situation of public calamity. With that, what is already difficult for companies today when it comes to obtaining credit, in two, three times get even worse, ” Mauricio Salvador, president of Abcomm, told LABS.

The direct purchase, by the Central Bank, of credit portfolios and corporate bonds–one of the alternative measures to make government-funded credit reach companies directly, and already used by central banks such as the Fed, in the United States–was not approved by the National Congress.

A light at the end of the tunnel via fintechs?

In an attempt to reduce the bureaucracy of access to credit, as their mission is, after all, fintechs have already proposed to mediate the resources available to micro and small entrepreneurs. In April, the Brazilian Digital Credit Association (ABCD in the acronym in Portuguese) said that the segment could triple the supply of credit lines in 2020 compared to 2019 and reach BRL 10 billion in new loans granted. 

In early May, BNDES told the newspaper Valor Econômico that he estimates the end of June to start distributing the credit for his program to support individual entrepreneurs, micro, small and medium-sized companies. The institution wants to contribute R $ 4 billion to this program, and that it be accessed via card “machine” companies, marketplaces and fintechs. 

The resources will be gathered through the creation of investment funds. According to what was said by the head of the BNDES ‘investment fund management department, Filipe Borsato, in an online press conference, up to ten partners will be chosen in the distribution of resources throughout the month of May.

For each fund, BNDES will provide 80% of the shares, and the remaining 20% ​​will come from the private sector. That means that if the total contribution is estimated at BRL 4 billion, the private sector may have to contribute with BRL 1 billion. According to Valor, after structuring the funds, at the end of June or at the beginning of July the funds should be available. It is a long time for those who need it most, but it is also a new operation that escapes the clutches of the big banks in the country.