Central Bank announces new package of measures to unlock up to R$272 billion in credit.

Reuters - The Central Bank announced on Tuesday a series of measures to encourage financial institutions to grant up to 272 billion reais in new loans, especially targeting smaller companies, which have been left without assistance amid the severe economic crisis caused by the coronavirus pandemic.

The action with the greatest potential impact involves optimizing the use of banks' capital so that, with the freed-up space, they can boost new loans to micro, small and medium-sized enterprises by up to 127 billion reais. To this end, the Central Bank created the so-called Working Capital for Business Preservation (CGPE).

In a press conference, the head of the regulatory body, Roberto Campos Neto, explained that, under the current tax framework, there is a time difference between when banks pay the tax after making a provision and when that payment is recognized in their accounting records.

"It's as if you paid the tax upfront and were left with a receivable later. Since you have a receivable, it becomes a credit, it's an asset of yours," he said.

This volume of assets has grown as a result of the expansion of the institutions' loan portfolios. They are incorporated into the banks' capital base, but end up consuming a lot of capital.

According to the Central Bank, 127 billion reais of so-called "assets arising from temporary differences" consume 105 billion reais of capital from institutions. This same volume, if applied to credit operations for micro, small and medium-sized enterprises, would consume 11 billion reais of capital.

With this relationship in mind, the Central Bank will allow banks to opt for this type of asset swap. In return, the institutions will have to allocate the surplus capital to credit for smaller companies.

"It's not something that changes the bank's risk balance, it's not a measure that generates any fiscal cost, it's neutral, and it's a measure where you are optimizing capital on the banks' balance sheets, and this optimization frees up capital," said Campos Neto.

"Given that we are releasing capital, we are asking in return for a loan; we are directing this because we understand that it is important to direct it to small and medium-sized enterprises," he added.

The CGPE loan program will have a minimum term of three years and a grace period of six months, and contracts can be signed until December 31st of this year.

Financial institutions must allocate at least 50% of the released capital to loans for companies with revenues of up to 100 million reais. Up to 20% should be directed to companies with revenues between 100 million and 300 million reais, and up to 30% to programs with shared risk with the government, such as the new Pronampe.

Property used as collateral for more loans

For families, the main new feature will be the possibility of using real estate as collateral for more than one loan, which will still be formally submitted by the government to Congress via Provisional Measure (MP), said Campos Neto, estimating that the text will be sent this week.

According to the Central Bank's calculations, the move could generate an additional volume of credit worth 60 billion reais.

In practice, the idea is that the bank customer can use part of what has already been paid towards their mortgage, borrowing this money from the financial institution at the same cost agreed upon in the original contract.

"If I took out a mortgage that represented 60% of the property value and I have already paid 30% of the property value, I will be entitled to ask the bank to lend me that 30% under the same conditions as the original contract," explained the Director of Regulation at the Central Bank, Otavio Damaso.

"It's a loan with very good collateral and a very good interest rate for the consumer... and it can be used however the family taking out the loan wants," he added.

More measures

The Central Bank announced further measures to unlock credit on Tuesday. Also seeking to favor smaller companies, the monetary authority decided that the balance of credit operations for working capital financing for companies with annual revenue of up to 50 million reais, contracted from June 29 to December 31, 2020, may be deducted from the compulsory reserve requirement on savings deposit funds, for a period of three years.

In this area, the expectation is that up to 55,8 billion reais will be released.

Furthermore, the Central Bank reduced the Risk Weighting Factor (RWF) for Special Guaranteed Term Deposits (DPGE) to 35%, from 50%, when the depositor is an institution associated with the Credit Guarantee Fund (FGC), seeking to encourage the flow of resources to ensure the liquidity of small financial institutions.

At the end of March, the Central Bank announced authorization for financial institutions to raise funds through Term Deposits with Special Guarantee from the FGC (Credit Guarantee Fund), a preventive measure to help small and medium-sized banks in particular during this time.

With Tuesday's change, the Central Bank predicted that there will be an increase in lending capacity of up to 12,7 billion reais.

Finally, the Central Bank also reminded on Tuesday that it promoted the temporary reduction of capital requirements for smaller financial institutions (S5), including cooperatives. The measure has the potential to release 1,3 billion reais in capital requirements, which could generate 16,5 billion reais in credit.

Campos Neto emphasized that this is the only measure from the package announced on Tuesday that has already been completed. The Central Bank has been monitoring its developments and has observed an increase in credit granted by cooperatives, he pointed out.