When Brazilian manufacturer Pumar e Cia's factory plunged from 600 workers to just 60, following a flood of cheap Chinese imports, it was a simple credit card that saved the business. Last year the card, (Cartão BNDES) administered by Brazil's development bank, disbursed a record $3.6 billion, but is it just one big card trick?
Launched in 2002 by BNDES, the card offers revolving and pre-approved credit of up to R$1 million ($310,000) to small businesses who can acquire pre-approved products on its website. Business owners must then repay the debt in up to 48 instalments. The bank last week announced that it processed 800,000 transactions for the card last year - no small amount.
Pumar e Cia's sale director Emílio Cantini (as told to BNDES in this book) says the company used the card for several years to acquire equipment and to modernise their factory.
What has helped more is that the company also became an accredited supplier on the card's website - one of about 60,000 firms listed on the site today supplying about 248 000 products and services (most in demand include machines and equipment, computers, software, vehicles and furniture).
To qualify a supplier must produce at least 60% of their product in Brazil. The card is therefore touted as a great way then to promote buying locally produced goods. But it also amounts to a protectionist measure by the state which ensures that uncompetitive products will still have a market.
To register for the card business owners must approach several banks which partner with BNDES, this has let some like Carlos Bezerra, a congressman, to last year complain that banks often include additional requirements on top of those demanded by BNDES.
Despite this, BNDES claims (in its 2013 annual report) that 50% of beneficiaries were able to access finance for the first time thanks to the card.
BNDES, which lends out more money a year than the World Bank has dazzled South African policymakers. The bank even has an office in Johannesburg and partners with South Africa's Industrial Development Corporation (IDC). But Brazil’s flagging economy has underlined a major flaw in the bank’s model.
The first problem is that loans (which last year came to staggering $58.7 billion in disbursements) are subsidised largely by allocations from the fiscus. Since 2009 this has totalled a whopping $112 billion.
Most of the development bank's funding go to large companies that arguably should be able to source finance from banks (it channels about half of all its resources to just 10 firms).
Secondly, loans are handed out at low interest rates – so low that Brazil's private banks which have long had interest rates which add up to 30% to 50% a year, are unable to compete with the development bank. BNDES charges just 5.5% in interest, less than half the present 12.75% rate which the central bank lends charges banks that lend from it, notes the Financial Times. It means BNDES is lending loans at a loss.
By one calculation made by Brazilian economists, if the central bank rate is measured at 12%, for every dollar lent out by BNDES, the treasury will get just 33c in return. This is a huge wastage.
The government has accepted that changes have to be made. The new finance minister Joaquim Levy last year announced his intention to reduce allocations from the fiscus to BNDES.
In addition the bank said while loans made to SMEs as well as to other priorities (infrastructure, innovation and the environment), would still receive its normal low rate, other sectors would have to put up with a mix of subsidised and market rates.
A good organisation
Criticism of its dubious model aside, the one thing the bank does have going for itself is it’s impressive organisational ability. It's probably why its impairment ratio is so low (averaging 2.9% between 2004 and 2013 according to Fitch Ratings) compared to other development banks.
A manager at BNDES, Roberto Procópio de Lima Netto (pictured left), in 1972 also came up with the idea for Sebrae (then called Cebrae which at first fell under BNDES). Today Sebrae is one of the world's leading small business agencies (thanks in part to stacks of funding it has access to - see this post).
At first glance Cartão BNDES might seem like a rather novel way to get more credit to small business owners. But then is it not something that banks should already be offering - by way of the traditional credit card or bank overdraft. Bank lending after all won't place such a massive burden on taxpayers.
The state should rather stimulate the private sector to lend more to small firms - via credit guarantees (see this post), co-investing with private funders or by tax incentives to angel investors, for example.
Such huge subsidies can cause all kinds of market problems - after all handing out so much free money is what's partly got Brazil into the present mess it's in.
Timm is a South African who writes on small business and is currently in São Paulo. Follow him on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a