High default rates in Brazil put brakes on microcredit

Monday, October 17, 2016

While banks see a chance to expand microcredit in Brazil as the economy seems set to recover, they are still hesitant because of high default rates in the country, which has led to plans being put on hold.

The default rate on microcredit this year reached a peak of 7.7%, according to local media. The current rate is 6.5%, slightly higher than the default rate of 6.2% for individual loans.

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According to the superintendent of microcredit at Santander Jerônimo Ramos, the microcredit sector could quadruple in size within five years, reaching 20bn reais (US$6.25bn) in loans.

He also told local daily Estadão that the potential market for microcredit includes 30mn to 50mn entrepreneurs when considering expanding the loan limit to 50,000 reais and maximum annual revenues of beneficiaries to 300,000 reais.

The figures Ramos cites are considerably higher than those allowed under the current rules, which he referred to as "restraints."

Brazil's central bank currently limits microcredit to entrepreneurs with annual revenues of up to 120,000 reais. The maximum amount per transaction is 15,000 reais and the interest cannot exceed 4% per month. According to the central bank, microcredit represents 1.3% of total personal loans in the country.