Brazil’s Best Counsel – Chapter Opening: Banking & Finance
Source: Leaders League
Brazil has one of the most dynamic debt markets among emerging countries. In a recent working paper sponsored by the IMF (WP/16/51), it is said that: “In recent years, Brazil has achieved substantial progress in capital market development by building a diversified investor base and expanding the menu of available financial instruments.”
The Brazilian credit market was deeply affected by the political crisis that impacted Brazil over the past couple of years and culminated in the impeachment of former president Dilma Rousseff in 2014. However, despite ongoing economic problems, the market is already showing signs of recovery. According to market information, after a sharp decline in 2015, the trend in the variation of the balance of loans to legal entities and individuals now is positive, although still behind the pre- 2014 crisis level.
A similar effect has occurred in the Brazilian capital markets. After the crisis, the market has shifted towards more traditional types of assets, such as debentures (which have always had a dominant position in the market) and promissory notes. The combined issuance of these instruments, during the first six months of 2018, represented more than 75% of the total volume of the Brazilian capital market.
In addition, this year Brazil will hold presidential elections in October. Current electoral uncertainties pose significant challenges to our economy. The Central Bank of Brazil discloses, from time to time, a report with the major market forecasts for the economy (the so-called Focus Report). In the most recent report, market forecasts for GDP growth indicate 1.44% for 2018 and 2.5% for 2019. Meanwhile, Brazil’s current unemployment rate sits around 12.5%.
The credit market will have an important role to play if Brazil wants to improve its current economic forecasts. Luckily, there are already positive trends in the horizon. Firstly, the Brazilian credit market will certainly be heavily affected by the presence of financial technology companies working to disrupt the financial market (the so-called fintechs).
The National Monetary Council (CMN) approved on April 26, 2018, Resolutions No. 4.656 and 4.657, which regulate the operation of credit fintechs (those who work with technology which facilitates access to credit). With new regulation in place, these startups, which today operate as banking correspondents in the credit market, may grant credit without the intermediation of a traditional bank. This new regulation aims to increase competition and the incorporation of new institutions, which could result in reduced interest for consumers because of the competition that these fintechs would bring to the credit market. Pursuant to the approved regulation, fintechs could be structured as (i) Direct Credit Companies, which will carry out operations using their own resources through an electronic platform; or (ii) Interpersonal Loan Companies, focused on financial intermediation (peer-to-peer).
Secondly, one of the initiatives which the Central Bank is attempting to implement in order to stimulate the credit market is a regulation on microfinance (Public Consultation No. 66/2018). This new regulation will affect transactions involving individuals or legal entities with a gross annual income of up to R$200,000 (approximately $50,000 as of today). The idea is to establish a special methodology to grant credits of up to R$21,000 and a maximum effective interest rate of 4% per month. This type of activity may boost consumption and help accelerate the economy, thus creating new jobs.
Campos Mello Advogados has been actively working in debt transactions (both domestically and cross-border) for a variety of corporate clients and financial institutions and has been at the forefront of the fintech market, in particular helping international clients to understand and invest in Brazil.
FOR FURTHER INFORMATION, PLEASE CONTACT:
Roberto Vianna do R. Barros
T: +55 11 3077 3513