Brazilian Legislation Introduces Concept of “Individual Banker”

By Arkady Petrov

RIO DE JANEIRO, BRAZIL – Authorized by the government a little over a month ago, the Empresa Simples de Crédito (ESC) already boasts 25 start-ups throughout Brazil.

The statute passed by Congress has legalized a new model–loan operations carried out by and for ordinary citizens, with interest and without direct regulation by the Central Bank.

The goal is for money to reach small entrepreneurs, for whom it is difficult to raise capital from large banks, despite representing 99 percent of the country’s private companies.

Karolina Duarte, the owner of a clothing factory, saw an interest rate of 7 percent per month when attempting to get a loan from a bank to invest in her business.

Frustrated, she turned to businesswoman Elaine Ferri, who became one of the first people to open a simple credit company in Brazil. The two, who already knew each other, performed the first operation of Elaine’s company, Simple Credit.

A R$10,000 (US$2,500) loan was granted at an interest rate of 3.5 percent per month — half of what the bank intended to charge — with a ten month repayment period.

Lender and Borrower know and trust each other

This model, along with other measures in the financial sector, has become a focus of the Executive Branch for equal access to credit for micro and small entrepreneurs.

Within two years, one thousand companies of this type should inject R$20 (US$5) billion into the economy, anticipates Sebrae.

In addition to fintech projects, startups linked to the financial system and corporate credit, the ESC’s entry into the market may potentially reduce interest paid on microcredit, says Guilherme Afif Domingos, a former minister and special advisor to the Ministry of Economy.

Today, the rate is 44 percent a year. “Microcredit is often talked about, and little is achieved because bureaucracy renders operational costs unbearable,” says Afif.

As with Karolina Duarte and Elaine Ferri, the close relationship between the borrower and the lender is seen as an asset for further low-cost loans. “It’s both a new and an old process,” says Afif. “It dates back to the early days of the credit system when a citizen in the town had a banking house and loaned to people he knew.”

Elaine Ferri was a pioneer in promoting the development of the ESC to Congress. A resident of São Paulo and owner of a debt collection company, she had saved capital to invest and was dissatisfied with the return on her savings account–less than 0.5 percent per month.

Her next credit operation plans to charge 3.8 percent interest per month to a hairdresser — more than the first loan, though less than the market value.

As for risks, should the borrower fail to repay the loan, the law provides that the ESC may employ the methods used by regulated lending, finance, and security discount institutions.

In the deal between Karolina Duarte and Elaine Ferri, the collateral chosen was a promissory note. “If she doesn’t pay, I’ll execute the promissory note,” says Elaine.

According to the law sanctioned by President Bolsonaro, a simple credit company is not subject to limitations on the rate of interest under the so-called Usury Law – a 1933 Decree prohibiting the charging of interest double the legal rate (today, the Selic).

For Afif, the market’s self-regulation can control abusive collection methods, since the risk of default is on the lender.

To formalize this kind of operation is a “great benefit”, says Sebrae’s technical director, Bruno Quick. “The rules are clear and transparent,” he said.

Quick assesses that the emergence of ESCs may also be an “excellent opportunity” for large banks since transactions should be made in deposit accounts.

Who may open a Simple Credit Company (ESC)?

Anyone may start a simple credit company, but each individual may only take part in one ESC, and affiliates are not allowed. Owners must register their company at the official Commercial Registry, and money can only be transferred by debit or credit into deposit accounts. Cash may not be used, and checks may not be exchanged.

How does the interest charged work?

It is up to the entrepreneur to decide on the interest that will be charged. The first simple credit company loan charged a monthly rate of 3.5 percent.

Who will supervise these companies?

The Central Bank does not supervise ESCs, but transactions must be registered with an official registrar authorized by the Central Bank or by the Federal Securities Commission (Comissão de Valores Mobiliários).

What taxes will they pay?

Despite having “simple” in its name, the ESC does not come under the favorable Simples Nacional tax regime. Taxation of income must comply with regular corporate tax rules.

To whom can an ESC lend?

A simple credit company can only lend to borrowers located within its own municipality or neighboring municipalities.