Brazil has announced new rules to expand payroll-deductible loans via a digital work card app, aiming to provide cheaper credit to private-sector workers. The initiative, introduced by President Lula, seeks to mitigate high-interest debts amidst rising interest rates. It could generate substantial loans and support millions of formal workers.
On March 12, 2023, Brazil introduced new regulations designed to expand payroll-deductible loans for private-sector workers via the digital work card app. This initiative aims to provide access to more affordable credit options amid President Luiz Inacio Lula da Silva’s declining popularity and the central bank’s ongoing interest rate hikes intended to temper economic growth.
President Lula referred to the expanded credit line as “a revolution,” cautioning, however, that it should not encourage excessive spending beyond one’s means. Finance Minister Fernando Haddad noted that private-sector workers currently face interest rates as high as 5% per month on unsecured credit lines, which could be reduced by half under the new program.
While payroll-deductible loans exist in Brazil, they have not been accessible to a significant number of formal workers due to reliance on individual agreements among companies and banks. The revised regulations will now allow all private-sector employees, including domestic and rural workers, to partake in these loans.
According to the estimates from Febraban, the new system could facilitate up to 120 billion reais (approximately $20.6 billion) in loans over four years, potentially aiding around 19 million formal workers out of a total workforce of 47 million. Presently, the loans issued via payroll deduction for private-sector workers amount to approximately 40.4 billion reais.
Marcos Pinto, Secretary for Economic Reforms at the Finance Ministry, emphasized the gradual implementation of the program, suggesting that there is no immediate cause for concern regarding inflation control. The government anticipates launching the system on March 21, aiming to mitigate excessive indebtedness by providing lower-cost loan options for refinancing existing debts.
The digital work card app, which the government supplies alongside employee record books, will allow workers to request loans directly from participating banks, with offers to be delivered within 24 hours. Monthly loan repayments will be automatically deducted from employee paychecks through the eSocial digital system. Workers may use up to 10% of their FGTS balance or the entirety of their termination penalty as collateral when securing these loans.
Banco do Brasil, Brazil’s public lender, expressed its intention to spearhead this initiative and anticipates making the credit offers accessible through their own channels by the end of April. CEO Tarciana Medeiros characterized the credit offer as “safe” and aligned with banks’ credit policies, maintaining a balance of risk and returns for each client.
The Brazilian government has taken significant steps to democratize access to affordable payroll-deductible loans for private-sector workers. Amid challenges from rising interest rates and declining popularity of the current administration, this initiative is positioned to generate substantial financial assistance and reduce the burden of high-interest debt. The government’s approach, leveraging digital platforms for efficiency, underscores their commitment to improving financial accessibility for millions of formal workers.
Original Source: www.marketscreener.com
