Brazil has implemented new rules to expand payroll-deductible loans via a digital work card app, enabling private-sector workers to access more affordable credit. This measure, introduced by President Lula amid declining popularity, is aimed at reducing high borrowing costs as well as tackling excessive indebtedness. The initiative could potentially offer significant benefits for millions of workers across various sectors.
On March 12, 2023, Brazil introduced new regulations aimed at expanding payroll-deductible loans for private-sector employees through the digital work card application. This initiative, led by President Luiz Inacio Lula da Silva, aims to provide more affordable credit options for workers amidst his declining popularity and concurrent interest rate hikes by the central bank designed to temper economic activity.
During a press conference at the presidential palace, President Lula characterized the new credit line as “a revolution” while advising consumers to manage their spending responsibly. Finance Minister Fernando Haddad later highlighted the current high-interest rates for unsecured loans, which can reach up to 5% monthly, indicating that these rates could be significantly reduced under the new plan.
Although similar payroll-deductible loans are already available, they have traditionally been limited due to reliance on individualized arrangements between companies and financial institutions. The new program will broaden access, extending the opportunity to all private-sector employees, including domestic and rural workers, aimed at as many as 19 million of the 47 million formal workers in Brazil.
Estimates from Febraban, a banking industry group, suggest that the updated system could facilitate loans totaling up to 120 billion reais (approximately $20.6 billion) over the next four years. Currently, payroll-deductible loans amount to 40.4 billion reais.
Marcos Pinto, Secretary for Economic Reforms at the Finance Ministry, indicated at the press briefing that the uptake of the new system would be gradual, alleviating concerns about it impeding the central bank’s inflation control efforts. The government plans to officially launch the program on March 21, aiming to help workers manage their debts more effectively.
Through the digital work card app, workers will be able to apply for loans directly from participating banks, with offers being communicated within 24 hours. Loan repayments will be deducted via the eSocial digital system, which collects employer-contributed data. Additionally, workers can use up to 10% of their FGTS severance fund balance as collateral for the loans.
Banco do Brasil has announced its intention to spearhead this credit initiative, and plans to make these loans accessible through its platforms by the end of April. CEO Tarciana Medeiros endorsed the program, stating, “It is a safe, profitable credit that respects the banks’ credit policy within the risk and return conditions of each client.”
In summary, Brazil’s new regulations on payroll-deductible loans aim to alleviate financial burdens on private-sector employees by providing access to lower-interest credit. This initiative, part of President Lula’s strategy amidst declining approval ratings and rising interest rates, seeks to broaden access to financial resources for millions of workers. By leveraging the digital work card app and minimizing reliance on individual employer agreements, the government hopes to stimulate responsible borrowing and reduce debt levels effectively.
Original Source: www.marketscreener.com
