The new face of credit in Brazil

What the new CLT Payroll-Deductible Loan is and how it will transform the credit landscape in Brazil

By Gustavo Rabinovitz (Senior at the Group)

On March 19, the Central Bank raised the Selic rate by 1 percentage point. Now at 14.25%, the benchmark interest rate has reached its highest level since 2016. Copom's 5th consecutive hike put Brazil in 4th place in the ranking of the world's highest real interest rates, that is, interest rates net of inflation. The scenario remains challenging, with inflation projections for the end of 2025 standing 2 p.p. above the 3% target for 2025, which could put even more pressure on interest rates. As a result, the cost of money remains high, making credit increasingly expensive for consumers and businesses.

Real interest rate ranking (Source: MoneYou)

Cheap financing for workers?

Two days after Copom's decision, the Federal Government announced the so-called “Crédito do Trabalhador” (Worker's Credit). It is a new payroll-deductible loan line for people in the CLT (formal employment), MEI (individual microentrepreneur), domestic worker and rural worker categories. This adds up to about 47 million people eligible for the loans. That is a lot of people. But any measure in Brazil divides opinion, and this time was no different. To unpack the main impressions about the new type of credit, it is first necessary to understand what it is and how it works.

First of all, a payroll-deductible loan (crédito consignado) is a category of loan whose installments are automatically deducted from the borrower's payroll. Other payroll-deductible lines already existed before, such as those for INSS beneficiaries. The key point is that, in payroll-deductible loans, banks are able to charge lower interest rates precisely because payment is deducted directly from the payroll, which reduces the risk of default, in addition to the savings on collections, calls and notices, which count as costs in loan types where collection is not automatic.

What the Federal Government did was launch a unified digital system, via the Digital Work Card (CTPS), which allows those who meet the rules to take out private payroll-deductible loans. Previously, the private version of this type of loan had very low penetration, since it depended on individual agreements between companies and banks to enable the salary deduction, a risky and bureaucratic model. With the new platform, the government centralizes this intermediation, eliminating the need for direct agreements with employers and making the product more accessible and with potential for expansion.

In this case, the collateral goes beyond the employee's salary. In previous payroll-deductible loans, the biggest risk factor for the bank was precisely the borrower being dismissed. Now, up to 10% of the Severance Indemnity Fund (FGTS), or 100% of the termination fine, will be used as collateral. It is worth noting that workers have the option of not using any of these amounts as collateral – which, of course, makes the interest charged more expensive.

Thus, through a risk analysis based on the length of employment, monthly income, loan term, amount requested and other outstanding loans, combined with the chosen collateral, banks grant or deny credit and set the monthly interest rate to be charged. In addition, banks may not grant loans with monthly installments exceeding 35% of the salary. JP Morgan ran tests through the CTPS with different user profiles to check which banks granted credit or not, and at what rates, in the first days of operation.

CLT Payroll-Deductible Loan eligibility test (Source: JP Morgan)

Despite the test's limitations, the most active banks were Agibank and Parati CFI. Caixa also stands out as the only larger bank present. However, the project is still in its first phase of implementation. Starting on April 25, loans will be negotiated through the banks' own apps and other players will join the project. Rates ranged from 2.99% to, in higher-risk cases, such as short employment history and other outstanding loans, 4.99% per month - about 42.6% and 79.5% per year, respectively. In other higher-risk types of credit, rates can exceed 9% per month, which corresponds to more than 180% per year.

According to a report by Uol, Nubank, together with Itaú, made a move aimed at creating obstacles to the credit portability mechanism (which allows a more expensive debt to be swapped for a cheaper one). For this mechanism, the new system requires all banks to disclose data on who holds debt at their institutions to Dataprev. Currently, data on each bank's specific customer base is not available. This resistance would have the goal of preventing other banks from offering cheaper credit to their own customers. Both Nubank and Itaú denied the accusations, stating that they oppose any barrier to portability and support free competition. Even so, the episode exposes the tensions and interests involved in changes that directly affect the current credit-granting model.

Criticism of the new payroll-deductible loan

It is clear that the measure is beneficial, especially for workers, who can now borrow more cheaply and more easily, but also for banks, which will gain in the volume of loans granted with interest, even if lower, and with more security. However, it does raise some concerns.

One of them revolves around the already high level of indebtedness of Brazilian households. Household debt to the National Financial System relative to income accumulated over the last twelve months, which shows how much debt represents of families' annual income, reached 48.3% in January, close to the all-time high of 2022. The introduction of a new, accessible credit line may stimulate immediate consumption and irresponsible use of credit. While, on the one hand, the payroll-deductible format brings lower rates and greater security for banks, on the other, there is a risk of worsening income commitment in the long term.

Household Debt to the SFN relative to income accumulated over the last 12 months, in January of each year (Source: BC)

Another concern is precisely the resulting stimulus to consumption. In its first week alone, the new payroll-deductible loan had already granted R$1.28 billion in loans across more than 190,000 contracts. And the number of requests in these first days is even more surprising: almost 12 million. And, as we well know, increased consumption leads to economic expansion. And the result of that is an old acquaintance of ours: inflation. This has led critics of the project to label it a populist measure to rescue the Government's dwindling popularity.

Populist or not, the new model has transformed access to credit in Brazil and has the potential to significantly expand financial inclusion. In a country where a large part of the population depends on credit for subsistence, being able to borrow more cheaply and easily is a major step forward. However, ease cannot be synonymous with recklessness. It is essential that this progress be accompanied by guidance. Payroll-deductible credit can be a powerful ally in workers' lives, as long as it is used with planning. At the end of the day, more important than having access to credit is knowing how to use it wisely.