Despite Pandemic Crisis, Loan Defaults in Brazil Decline

RIO DE JANEIRO, BRAZIL – The economic crisis triggered by Covid-19 in the country has raised unemployment to record levels and caused the closure of countless companies. But, contrary to what might have been expected, the loan default levels, whether of individuals or companies, have declined.

According to experts, this surprising scenario is the direct result of emergency aid, rescue programs for small and micro companies, and also the interest rate at record low levels, which allowed banks to renegotiate debts. At the peak of the pandemic, financial institutions also deferred repayments by 60 days.

The main question is how will default behave when all these aid measures end and the economy must move on its own again. There is concern that default will explode at the beginning of next year.

“The drop in defaults is something unprecedented,” says economist Luiz Rabi, from Serasa Experian, a company that monitors the financial situation of consumers and companies in Brazil. In July, the latest available data, 63,5 millions Brazilians were in default, according to Serasa research. That is 2,5 million people less in relation to April, when the country froze because of Covid-19. The number of companies with overdue debts also retreated in July to its lowest level in the year: 5.8 million, which is exactly the same number of companies in default recorded in July last year.

Another default indicator is the number of companies that have filed for court-supervised reorganization. That is, they recognized their financial inability to pay their debts on time and requested special conditions from the courts. The data, collected in all the Brazilian registry offices, shows that this year, up to August, 868 companies sought this path, a number 7.3 percent lower than recorded in the same period in 2019. For the first eight months of the year, the number of cases in 2020 was the lowest since 2015. At the current pace, it is expected that 2020 will end with 1,300 requests. In 2019, without a pandemic, there were 1,387.

Rabbi says that the risk of default rising is linked, at first, to consumers, and then to companies. “Brazilians who lost income are currently dependant on the emergency aid, which has a date and time to end (in late December)”. If by the end of the year the picture is still poor for employment, individual default can rise and drift onto the corporate entity, which will not receive payment on time. “Default is blocked, it is not extinct,” warns Rabbi.

Fabio Bentes, chief economist of the National Confederation of Goods, Services and Tourism (CNC), says that banks are putting off the default problem. “They have granted a grace period, so the indicator is not shifting.”

Banks

From the start of the crisis until August, banks deferred R$110.5 billion in debts, in a total of 14.2 million contracts, according to the Brazilian Federation of Banks (FEBRABAN). Of this total, the largest portion of beneficiaries includes small companies and individuals, a total of R$62.2 billion. This month, the first round of grace periods expires, which may be coupled with an increase in default in a high unemployment scenario.

The concern of banks with default risk is reflected in their balance sheets. In the second quarter, Bradesco, Itaú Unibanco, Banco do Brasil and Caixa increased their provisions for bad debtors by over R$14 billion, totaling R$193.6 billion.

Simone Pasianotto, chief economist of Reag Investments, believes that family default will peak by the end of this year. Bentes, from CNC, recalls that the R$600 emergency aid was reduced by half as of September. He wonders if after the end of these measures the economy will be capable of growing again on its own to tackle default, since investments have not been resumed.

No leftovers

Waste-picker of recyclables Gisele Santos da Silva, 34 years old, married and mother of two daughters, has been in default since 2012. At the time, she was working as a cleaning assistant, was fired and the company failed to pay the severance. As a result, she ran out of income to pay off her credit card bill and her debt snowballed.

In August, with interest and a fine, she owed around R$700. But she managed to pay off the debt and leave the debtors list, paying R$143. “It was easy to negotiate this time, I did not expect this discount.”

As a waste-picker, Gisele makes between R$300 and R$350 a week, but the income is unreliable. She is receiving the emergency aid, which until August amounted to R$600 and was reduced by half as of September. “With the aid I’m paying the bills, there’s nothing left, even more so now with everything increasing.”

Source: Estadão Conteúdo