Brazilian credit Fintechs at risk of rapid bad loan accumulation, Moody's warns

April 6, 2020
Senior Vice President at Moody's Investors Service.
📷
wundermanthompson.com
Credit financial technology firms in Brazil have a customer base that is highly susceptible to economic downturns, Moody's said in a report, warning that the country's fintechs have little to no cash liquidity to navigate a potentially prolonged period of sharply lower sales.

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On 26 March, Brazil’s National Monetary Council (CMN) announced measures to increase financing to micro and small businesses affected by sharply slowing commerce amid the coronavirus. To support individuals and small companies, CMN authorized digital peer-to peer and direct-credit partnerships to issue credit cards, lend funds from federal development bank Banco Nac. Desenv. Economico e Social (BNDES, Ba2/Ba2 stable, ba21 ) and sell securitized loan portfolios to a wider range of investment funds than previously allowed.

The measures will improve fintechs' access to liquidity so they can provide credit to their core micro and small business clients. However, originating loans in a stressed scenario with increased credit risk will challenge the companies’ risk management capabilities. Depending on the length of the coronavirus-related economic downturn and speed of recovery, fintechs' problem loans could rapidly accumulate and test these firms' limited loss-absorption capacity and more lax regulatory framework.

Brazil's credit fintechs are still developing. According to the Associação Brasileira de Credito Digital and PricewaterhouseCoopers, as of year-end 2018, Brazil's credit fintechs had roughlyBRL1 billion ($240 million) of outstanding loans, most of which were securitized and sold to domestic investment funds (Fundo de Investimento em Direitos Creditórios). Only 18% of the country's 529 fintechs are dedicated to lending, but just nine of them are peer-to-peer(P2P) and direct-credit partnerships regulated by the central bank. These include Creditas, Tanger and HB Capital, all direct-credit partnerships and Nexoos, Mova and Money Plus, which are P2Ps. The remaining credit fintechs, which have different regulations than those for P2P and direct-credit partnerships, operate as correspondent banking entities served by incumbents. Since 2017, the positive credit cycle and regulatory incentives to foster competition and innovation supported their growth. Funding capacity has always been their key constraint because they rely on loan sales to specific investment funds that invest mainly in loan receivables, and on capital raised in the local capital markets and/or from private and primarily foreign equity investors. In the current downturn, these funding alternatives are less available.

The credit fintechs will be able to offer credit lines from BNDES and to securitize loans to a broader range of investment funds, not only those funds exclusively structured around loan receivables. The regulator also reduced the credit fintechs' provisioning requirements for loans renegotiated by September 2020, giving them more leeway to manage rising asset risks and potential liquidity shortages.

The easier requirements intend to incentivize the low-cost digital financial platforms to provide credit to coronavirus-affected small entrepreneurs and informal sector workers. These workers are concentrated in the services and retail segments and their access to traditional banks is often limited because they lack or have a limited credit history. Although the fintechs' lending potential is small, their customer base is very vulnerable to economic downturns and they have little or no cash liquidity to weather the next two months (or more) of steeply lower sales.


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1221571

Las opiniones compartidas y expresadas por los analistas son libres e independientes, y de ellas son responsables sus autores. No reflejan ni comprometen el pensamiento u opinión de Latam Fintech Hub, por lo cual no pueden ser interpretadas como recomendaciones emitidas por la platafomra. Esta plataforma es un espacio abierto para promover la diversidad de puntos de vista sobre el ecosistema Fintech.

On 26 March, Brazil’s National Monetary Council (CMN) announced measures to increase financing to micro and small businesses affected by sharply slowing commerce amid the coronavirus. To support individuals and small companies, CMN authorized digital peer-to peer and direct-credit partnerships to issue credit cards, lend funds from federal development bank Banco Nac. Desenv. Economico e Social (BNDES, Ba2/Ba2 stable, ba21 ) and sell securitized loan portfolios to a wider range of investment funds than previously allowed.

The measures will improve fintechs' access to liquidity so they can provide credit to their core micro and small business clients. However, originating loans in a stressed scenario with increased credit risk will challenge the companies’ risk management capabilities. Depending on the length of the coronavirus-related economic downturn and speed of recovery, fintechs' problem loans could rapidly accumulate and test these firms' limited loss-absorption capacity and more lax regulatory framework.

Brazil's credit fintechs are still developing. According to the Associação Brasileira de Credito Digital and PricewaterhouseCoopers, as of year-end 2018, Brazil's credit fintechs had roughlyBRL1 billion ($240 million) of outstanding loans, most of which were securitized and sold to domestic investment funds (Fundo de Investimento em Direitos Creditórios). Only 18% of the country's 529 fintechs are dedicated to lending, but just nine of them are peer-to-peer(P2P) and direct-credit partnerships regulated by the central bank. These include Creditas, Tanger and HB Capital, all direct-credit partnerships and Nexoos, Mova and Money Plus, which are P2Ps. The remaining credit fintechs, which have different regulations than those for P2P and direct-credit partnerships, operate as correspondent banking entities served by incumbents. Since 2017, the positive credit cycle and regulatory incentives to foster competition and innovation supported their growth. Funding capacity has always been their key constraint because they rely on loan sales to specific investment funds that invest mainly in loan receivables, and on capital raised in the local capital markets and/or from private and primarily foreign equity investors. In the current downturn, these funding alternatives are less available.

The credit fintechs will be able to offer credit lines from BNDES and to securitize loans to a broader range of investment funds, not only those funds exclusively structured around loan receivables. The regulator also reduced the credit fintechs' provisioning requirements for loans renegotiated by September 2020, giving them more leeway to manage rising asset risks and potential liquidity shortages.

The easier requirements intend to incentivize the low-cost digital financial platforms to provide credit to coronavirus-affected small entrepreneurs and informal sector workers. These workers are concentrated in the services and retail segments and their access to traditional banks is often limited because they lack or have a limited credit history. Although the fintechs' lending potential is small, their customer base is very vulnerable to economic downturns and they have little or no cash liquidity to weather the next two months (or more) of steeply lower sales.


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1221571

Las opiniones compartidas y expresadas por los analistas son libres e independientes, y solamente sus autores son responsables de ellas. No reflejan ni comprometen el pensamiento o la opinión del equipo de Latam Fintech Hub y, por lo tanto, no pueden interpretarse como recomendaciones emitidas por la plataforma. Esta plataforma es un espacio abierto para promover la diversidad de puntos de vista en el ecosistema Fintech.
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