As Brazil begins to recover from a two-year recession its leaders have ordered the country’s much criticised development bank BNDES to ratchet up lending to small firms.
These were the instructions from President Michel Temer, as the bank’s new president, economist Paulo Rabello de Castro (pictured above), assumed the role of head of the institution on June 1, according to a news report.
Big firms, easy money
The development bank, which dominates long-term lending in Brazil because of sky high interest rates at banks, has long been criticised for providing mostly big (many of them politically connected) firms with easy money.
Among the bank’s 145,000 clients, large companies account for fewer than five percent of transactions at the bank, but made up almost 69.1% of disbursements last year, according to the banks 2016 annual report.
In 2012 large firms accounted for 49% of disbursements, reveals a BNDES report, while the bank revealed recently that between January and April just 38% of loans went to small businesses, totalling 8.2 billion reals or 13% less than the same period last year.
In recent months the bank has come under fire for its connections with businesses it helped fund such as Odebrecht, which the state is investigating for corruption.
The bank has also been criticised for relying on the treasury to subsidise cheap credit - something it is seeking to now address. In 2016 the bank also undertook to pay off debt of 100 billion reals ($30bn) to the treasury.
In addition after expanding at 12% per year between 2007 and 2014 reaching 187.8bn, the bank’s total disbursements slumped to 88.3bn reals last year.
As such the bank is now trying to find new ways to ramp up lending to small businesses.
These include simplifying its application processes, the introduction last year of a new venture-capital fund, a new venture debt offering to be rolled out this year and the expansion of its successful Cartão BNDES - a card which allows small firms to get services and goods on credit from approved suppliers.
The venture capital fund-of-funds offering, Criatec 3 - the bank's third since 2007 - was launched in February last year.
The fund will invest in private funds that will then invest in firms in innovative sectors such as IT and biotechnology with an annual revenue of up to 12 million reals ($3.6m). The 22m reals fund is managed by a private sector company Inseed.
Last year almost 1,000 applications were evaluated and in April BNDES announced the first investee - Chip Inside, a software firm that performs real-time monitoring of the gestation period of dairy cows.
Also in April BNDES announced that it would support small innovative businesses through a new venture debt instrument whereby it will launch a 20-million reals fund that would see it invest alongside private investors.
The fund will be managed by a private investor, which will be announced in August following a public call.
In addition the bank in March doubled the maximum limit for disbursements under its BNDES card, to 2 million reals,
Under the card small firms can buy goods and services from approved service providers on credit (see this earlier post). The interest rate is lower than the banks (on 31 December last year it stood at 1.19% a month).
The bank’s director of indirect operations Ricardo Ramos said in December last year that the bank also intends to create a version of the card for agribusiness.
Lending under Cartão BNDES halved last year to just over 5.6 billion reals through over 422,000 transactions, from 11.2 billion the year before through 571,000 transactions.
The card has made some impact. A 2011 BNDES study revealed that companies that used the card were able to increase employment by 8% at the end of year for those that used the card in 2008 and an increase of almost 10% in late 2009, in relation to the companies that were issued the card in 2008 but did not use it.
But an accounting trick – the bank in December increased the annual revenue threshold for firms that qualify as small businesses from 90 million reals to 300 millions reals – might help the bank to increase disbursements to small businesses by about 20%, according to the bank’s director of indirect operations Ricardo Ramos.
It will mean about 1,500 new businesses will be labelled as small businesses in 2017.
However the bank’s simplification of certain procedures has lowered the average application period from 30 to just two working days, he said.
Yet though the economy grew by one percent in the first quarter, unemployment has worsened – expanding from 12.6% in the quarter to end of January, to 13.6% in the quarter to end of April.
Above all Brazil badly needs to become more innovative. It has slipped from 40th place in 2009 on the International Institute of Management Development’s competitiveness ranking to 61st of three worst, this year.
Expanding funding to small firms, particularly those developing innovative solutions, may be one way Brazil could boost its lagging competitiveness, while adding new jobs.
Timm is a South African who writes on small business. He has not visited Russia before. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a