Letter IEDI n. 1018–Guarantee funds and credit for small and medium-sized companies
The coronavirus pandemic is having serious negative impacts on smaller companies. The reduction in sales and the shortage of loans led to a sharp drop in their cash inflows, which was not met by new credit. The persistence of these imbalances tends to result in widespread bankruptcies and judicial recoveries. Such an outcome can still be prevented.
The new Emergency Guarantee Funds, FGO (Guarantee Fund for Operations) and FGI (Guarantee Fund for Investment), seek to act on this dimension of the crisis. Through them, a public guarantee is offered for loans that banks may make to smaller companies, until the end of 2020.
From this point of view, they address one of the central problems of the economy at the present time: the lack of appetite of financial institutions to grant new credit to micro and small enterprises (MSEs).
However, two issues remain that can reduce the effectiveness of these innovations. First, in the case of the FGO, there are operational difficulties that will need to be overcome. Only Banco do Brasil, Caixa Econômica Federal and Banco do Nordeste are immediately able to offer credit with this type of guarantee. The other banks will operate these lines for the first time and, therefore, need to promote investments in systems and processes adaptation beforehand.
Second, when it comes to the FGI, the obstacles are of a different nature. The maximum interest rate allowed for guaranteed portfolios— which on average cannot exceed 1.25% per month—means an annual cost of 16.1%. This percentage seems high in relation to the current Selic base rate (2.25% p.a.) or even if compared to the rate of working capital operations carried out in May (15.2% p.a. according to the Central Bank).
The two new Funds, however, have a feature that should facilitate the quick addition of banks. Both were designed to also be an implicit form of subsidy. This is because the premiums charged for these public guarantees are unlikely to be enough to maintain the capital originally contributed by the National Treasury.
Given the nature of the coronavirus crisis and the public served, however, this benefit is socially justified and is in line with international experience. In other countries, the newly created guarantee funds even have clauses that provide for the forgiveness of part of the loans to companies that manage to honor a certain percentage of the amount originally taken.
In doing so, they help to prevent a temporary liquidity problem from developing into a definitive picture of insolvency for various firms, with very negative impacts on income and employment levels.
Thus, these funds must be evaluated from a perspective that considers the high number of companies contemplated, which were financially healthy before the crisis and which, without financing, would close their doors due to temporary mismatches between their revenues and obligations.
This perspective leads to the third and most important challenge that will be faced by the two new Funds: being able to stimulate financial institutions to increase loans to micro and small companies.
If banks use the new guarantee mechanisms only to renegotiate existing loans, the positive effects will be partial. The main benefit for customers will be the extension of their liabilities and a reduction in working capital costs and, for financial institutions, the transfer of a portion of the risk of these operations to the government.
In this case, only a part of the credit difficulties of the MSEs will be minimized and the financial gap generated by the interruption of the companies' cash inflows will remain largely intact. It will be better if there is an increase in the stock of working capital operations, since the crisis has imposed an additional demand for new loans that also needs to be met.
In any case, the preliminary assessment is that the new FGO and FGI are mechanisms that are going in the right direction and are, at this time, strategic to reduce the chances of a serious corporate insolvency problem in the coming months. Below, more details on the theme developed by economists Ernani Torres, Luiz Macahyba and Norberto Martins.