Brazil Expands Payroll-Deductible Loans to Alleviate Financial Burdens for Workers

Brazil has declared new regulations to enhance access to payroll-deductible loans for private-sector employees via the digital work card app, aiming to provide cheaper credit amid rising interest rates. The initiative, introduced by President Lula, targets responsible borrowing and could benefit around 19 million workers, potentially generating up to 120 billion reais in loans over four years.

On March 12, Brazil introduced new regulations to broaden access to payroll-deductible loans for private-sector employees through the digital work card application. This initiative by President Luiz Inacio Lula da Silva seeks to provide affordable credit to workers at a time when his approval ratings are declining due to rising interest rates instituted by the central bank to moderate economic activity.

President Lula described the new credit line as “a revolution” but cautioned against viewing it as a temptation for individuals to overspend. His comments aimed to strike a balance between enhanced access to financing and responsible borrowing.

According to Finance Minister Fernando Haddad, private-sector workers currently face interest rates reaching 5% monthly on collateral-free credit. The new program is projected to reduce these rates by half, alleviating financial burdens on workers. Previously, access to such loans hinged on individual agreements between employers and banks, limiting availability.

The expansion allows all private-sector employees, including domestic and agricultural workers, to benefit. Banking industry estimates suggest that the new system could generate loans totaling up to 120 billion reais ($20.6 billion) over four years, potentially aiding approximately 19 million formal workers out of 47 million.

Currently, payroll-deductible loans for private-sector workers amount to 40.4 billion reais. Marcos Pinto, the Finance Ministry’s economic reforms secretary, noted that the new scheme would gradually gain acceptance, alleviating concerns over its potential impact on inflation control efforts.

The initiative is slated to launch on March 21, providing lower-cost credit aimed at refinancing more expensive debts to lessen excessive borrowing. Workers will utilize the digital work card app to apply for loans, receiving offers within 24 hours to finalize transactions through the respective banks’ platforms.

Loan repayments will be directly deducted from wages through the eSocial digital system, which consolidates employer reports. Additionally, workers can use up to 10% of their FGTS severance fund balance as collateral, alongside 100% of any severance penalty if dismissed. Banco do Brasil plans to spearhead this credit initiative and anticipates making it accessible through its channels by late April. CEO Tarciana Medeiros emphasized the initiative’s safety and profitability, aligning with banks’ risk management policies.

In conclusion, Brazil’s new regulations to expand payroll-deductible loans aim to provide a lifeline for private-sector employees amidst rising interest rates. This transformative initiative highlights the government’s commitment to making affordable credit available while promoting responsible borrowing. With significant potential to alleviate financial burdens for millions of workers, the program’s successful implementation will require strategic planning and phased adoption.

Original Source: www.marketscreener.com