New legal framework for loan guarantees

Wols (Alfred Otto Wolfgang Schulze), untitled (time_money), 1988.
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By LUÍS SERGIO CANÁRIO*

The Ministry of Finance remains a neoliberal stronghold in a government elected to be in the interests of the people of this country.

The Lula government, through the Ministry of Finance of Fernando Haddad, decided to support a bill, PL 4188/21, forwarded by the government of Jair Bolsonaro, through the Ministry of Economy of Paulo Guedes. It was approved by the Chamber and on the 7th of July by the Senate, returning to the Chamber due to changes in the Senate. This PL establishes a new legal framework for loan guarantees. Guarantees that seek to protect the bank's rich money.

The thesis is that this new legal framework will reduce the interest rate paid on loans to individuals for the purchase of movable property, such as cars, and real estate, such as apartments. The magic would happen because, as the new framework facilitates the taking of the asset financed by the bank in case of non-payment, the interest rate would fall, due to the reduction of the banking spread, which is the difference in the rate that the bank pays to those who apply his money and the one he receives from money lenders.

Today it is on the average among banks at around 19 percentage points, for an interest rate, also average, for financing with bank free resources of around 47% per annum. The interest rate for cars is 27% and for other personal property 88%. The data is from central bank.

What is the guarantee that the bank will reduce the interest rate with this new approved framework? None. The tendency, as shown by history in our country, is for the bank to reduce the spread a little and pocket the rest as profit. Dilma tried to reduce the price of home appliances by reducing the tax burden for manufacturers. The result? Industry took a small price cut and pocketed the unpaid taxes, raising the rate of profit at government expense.

The bank spread is mainly composed of: (i) Default rate: The general default rate in Brazil is high. With credit cards, it is around 49% and with vehicle purchases, 5,5%. In this scenario, the bank transfers the loss to interest rates, trying to compensate for the losses. In the financing of movable and immovable property, banks find it difficult, due to current legislation, to confiscate the financed property, which contributes to increased risk.

(ii) Compulsory Deposit: Fee that the Central Bank charges banks and financial institutions to regulate the availability of money in the economy. (iii) Tax factors: Taxes and contributions paid by banks. (iv) Competition: Very low in Brazil. Credit alternatives, such as Fintechs, are still very recent among us. (v) Funding cost: How much it costs the bank to raise funds used in financing. (vi) Bank profit: It is a relevant item in the composition of the spread.

Central Bank Data (BC)

As you can see, the new framework tends to change little with the spread. It will only affect default in some way, reducing the period in which it is possible to recover the financed assets and allowing a property to be given as collateral in more than one financing. The other factors remain as they are. What will the spread to fall? In real estate financing, the default rate is 1,8%. And in the acquisition of vehicles 5,5%. How much would they need to lower these values ​​for a significant change in the spread and thereby reduce the interest rate? Always remembering that all other factors that make up the spread calculation follow the same.

According to the Central Bank, the general spread for individuals is 28,30 percentage points. The government should, along with the proposal, inform the expectation of a reduction in the spread, and consequently in the final interest rate, for society to assess the impacts of this measure. Roberto Campos Neto, president of BC, spoke, according to the Economic Conjuncture Blog from FGV/IBRE, that reforms that would allow better use of real estate as collateral would unlock around R$500 billion for new loans. Where did that number come from? We need to know. Also, what is the spread practiced on these lines of credit with these new guarantees?

The project approved by the Chamber was changed in the Senate, among other things, removing the issue of taking over the financed asset, automobiles and real estate, without the need for a judicial process, in an execution carried out at the registry office itself, for cases of default. Today this depends on a lawsuit. The amendment removed that possibility, for the time being.

This is a sword hung around the neck of the people. In case of failing to pay a car loan, for example, the creditor puts the debt in the protest and can go to a notary office to demand the taking of the car given in guarantee. There would be the possibility of resorting to justice, but only for the creditor. The debtor must deliver the good without any possibility of recourse to justice.

Imagine the party of extrajudicial executions with power completely in the hands of the bank. And that is what, according to experts from the Ministry of Finance, will reduce the bank spread. It will indeed make it rain in the garden of banks and notary offices, which will certainly charge a good price for this service rendered to banking friends. Only the very naive or people of bad faith would believe in the significant reduction of spread.

Another novelty is permission for a property to be used as collateral for more than one loan. A property worth R$1 million can only be given as collateral to one person, even if the value is, for example, R$100. As long as the loan is not fully repaid, it cannot be pledged as collateral for anything else. This amendment allows for this property to be pledged as collateral for up to, for example, 10 loans of R$100. The same would apply to financed properties. If that same property were financed and the outstanding balance was R$500, it could be pledged as collateral up to the amount of R$500.

This has been standard practice in the US for a long time and is used frequently there. This mechanism was at the heart of the subprime crisis in 2008. The rise in real estate prices allowed people unable to pay the first loan of the acquisition, take a second to pay off the first and a third to pay off the second, all with rates of post-fixed interest. Rising interest rates, falling property prices and unemployment led to bad debts skyrocketing. And the bank was left with a huge stock of real estate in its hands and no cash to pay for the complex financial products mounted on this mass of rotten credits. The story is known.

Looking at the work as a whole, this PL is one more of the projects that come out or are supported by the Ministry of Finance of the Lula government that serve exclusively the interests of banking and the financial market. Who cares about being able to seize your clients' assets in summary and extrajudicial proceedings? And this without any commitment or target imposed by the government that results in a reduction in the spread and therefore a reduction in interest rates for people. If the fear of being able to see your assets taken by the bank in the event of default in a quick and authoritative manner actually reduces defaults, how will this be reflected in the spread? Nobody knows, nobody explains.

The Ministry of Finance remains a neoliberal stronghold in a government elected to serve the interests of the people of this country. Step by step, we are witnessing the shrinking of the State's ability to intervene in the economy. A revised spending ceiling with the beautiful name of Fiscal Framework. A tax reform that goes to the heart of the distributive issue, serious in our country. And so on.

Lula obviously has responsibility for this. These projects don't go ahead without him at least knowing about it. If we are now in a moment of recovery from the scorched earth left by the Jair Bolsonaro government and we are managing to move forward and significantly improve the scenario, what has come out of the Ministry of Finance compromises actions in the medium term. And that medium term is there, in the next 12 months.

*Luis Sergio Canario is a master's student in political economy at UFABC.


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