BRASILIA (Reuters): Brazil announced new rules on Wednesday to expand payroll-deductible loans for private-sector workers through the country’s digital work card app, allowing them to access cheaper credit.
The measure by President Luiz Inacio Lula da Silva comes as his popularity has sharply declined in opinion polls, and is expected to boost borrowing, running counter to the central bank’s aggressive interest rate hikes aimed at cooling economic activity.
Speaking at the presidential palace, Lula said the expanded credit line would represent “a revolution,” but it should not be seen as an incentive for people to spend more than they can afford.
At the same event, Finance Minister Fernando Haddad emphasized that private-sector workers currently pay interest rates of up to 5% per month on credit lines without collateral, adding this burden could fall by half under the new program.
This type of credit already exists in Brazil, but the government’s economic team had argued it did not reach a large share of formal workers, as it depended on individual agreements between companies and banks.
Now any private-sector worker, including domestic and rural employees, will have access to the program.
Estimates from banking industry group Febraban released by the government indicate the new system could generate up to 120 billion reais ($20.6 billion) in loans over four years, potentially benefiting around 19 million formal workers out of a total of 47 million.
Currently, credit operations via payroll-deductible loans for private-sector workers total 40.4 billion reais.
Marcos Pinto, the Finance Ministry’s secretary for economic reforms, said at a press conference the new system will take time to gain adoption.
“This will be gradual,” he said, adding there is therefore no need to worry that the program’s economic stimulus will hinder the central bank’s efforts to control inflation.
According to the government, the system will launch on March 21 and aims to reduce excessive indebtedness by offering a lower-cost credit line for refinancing more expensive debt.
Workers will use the digital work card app, which is provided by the government with their employment record books, to request loans directly from banks participating in the program. They will receive offers within 24 hours and complete the transaction through the chosen financial institution’s platform.
Loan repayments will be deducted monthly from workers’ paychecks via the eSocial digital system, which consolidates employer-submitted records.
Workers will be able to use as collateral up to 10% of their balance in the FGTS severance fund – which employees can draw from in certain circumstances, such as buying a home, loss of employment or serious health problems – and 100% of any termination penalty in case of dismissal.
