Government wants to make company credit cheaper – 02/25/2024 – Market

The Luiz Inácio Lula da Silva (PT) government launched an offensive to try to bring down the cost of credit for companies in 2024 and is betting on nine projects to attack the so-called banking spread.

One of the proposals under study is to include, in the tax reform regulations, the granting of presumed credit to companies that take out loans in the financial sector.

The spread is the difference between the interest the bank charges when lending to customers and the rate it pays to raise the money. The idea is for companies to use the value of the tax credit to reduce the payment of federal taxes, which in practice means a reduction in the burden on operations.

The Secretary of Economic Reforms of the Ministry of Finance, Marcos Barbosa Pinto, anticipated the Sheet that the package will seek a VAT (Value Added Tax) model for the financial system that allows the reduction of the spread and guarantees the non-cumulative nature of the tax — avoiding the cascading collection of tax on tax.

“No country in the world has come up with a good VAT model for the financial sector. We have the means to create a great model. We cannot be content with sticking with a model similar to PIS/Cofins today”, says Pinto.

The discussion is being carried out at a technical level between the Economic Reforms teams and the Extraordinary Secretariat for Tax Reform, led by Bernard Appy. “If it’s not possible, we won’t do it, but the feeling we have is that it is viable”, he highlights.

The tax reform established a specific taxation regime for financial services, which includes credit operations and the so-called financial intermediation (bank spread). They will be taxed by the new VAT, but with specific rules to be defined in a complementary law.

The government’s idea is to allow, in regulation, that companies that take out a loan in the financial system are entitled to a presumed credit relating to the tax charged by the financial institution when granting the financing.

“We now want to agree on a VAT model that reduces costs, so that it is modern, with fewer additional obligations for the financial sector, and that, as far as possible, gives credit to legal entities that took out loans”, says Pinto.

Most countries exempt bank spreads from taxation. In Brazil, the tax burden on operations currently accounts for 22% of the intermediation cost.

The difficulty, says the secretary, is that the reform was approved with a lock in place: the level of taxation on banks can neither rise nor fall. The requirement is to maintain the same current level of burden on the sector.

Even if it so desired, the Executive would face legal obstacles to reducing the charge or even exempting the spread. The granting of presumed credit, however, could achieve the expected effect without encountering this problem.

The new round of measures to attack the cost of credit for companies and the spread also contains projects that are already being processed in the National Congress, but did not advance in the second half of last year given the economic agenda very concentrated on fiscal, budgetary issues and the PEC itself. (proposed amendment to the Constitution) of tax reform.

The focus of the Ministry of Finance’s agenda now is to approve tax reform regulations and a new legal and regulatory framework for the financial system through these projects.

According to the secretary, what is new compared to other attempts in the past is that the package of proposals creates conditions to increase competition in the credit market in Brazil, currently concentrated in large banks.

The objective is to use instruments that facilitate the search for resources for new investments by companies in the capital market, through the issuance of private bonds and on the stock exchange.

In Brazil, the spread is historically high for several reasons, such as high default rates, low competition and high taxation.

Last year, the average interest rate charged on new loans fell to 28.4%, 1.7 percentage points below that seen in 2022. But the drop was accompanied by an increase of 0.4 percentage points in the banking spread, which closed last year at 19.7 percentage points, according to data from the Central Bank.

To try to attack the different components of this cost, the Treasury’s credit agenda contains five pillars: reducing defaults, capital markets, regulation of the banking sector, insurance market and taxation of the financial sector after the reform.

One of the focuses is to attack the high default rate on unsecured financing and improve the recovery of assets by creditors in bankruptcy proceedings.

Today, the asset recovery rate is 12.2%, and debt recovery is just 6.1%. The indicators are considered very low compared to what companies usually offer in terms of goods and resources at the beginning of processes.

The major obstacle is the delay in collecting and evaluating assets, which contributes to the loss of asset value and compromises the success of the plan. The project that amends the Bankruptcy Law proposes the establishment of a fiduciary manager, who will have more flexibility and agility to sell the assets and pay the company’s creditors.

Another project envisages punishing company managers who violate capital market operating rules, which includes cases of accounting fraud — such as what happened in the case of Americanas, for example.

If approved, the new law will not apply to past cases, but will give more security to investors, encouraging the investment of resources in companies and expanding this source of capital — with increased competition in the credit market.

Pinto states that default rates have fallen in recent years, but there is still a long way to go given the persistence of the spread at high levels.

Despite its name in English and often being difficult to understand by the general public, the banking spread directly affects the lives of citizens and the economy. The high intermediation cost makes credit more expensive and less accessible, which negatively impacts consumption.

“This is a very important agenda. Imagine how much investment is not made because the investor goes to take out a loan and finds that he or she is unable to pay,” says Pinto.

In his assessment, the economic debate in Brazil has focused for years on fiscal adjustment and interest rates, but it is time to attack microeconomic issues more forcefully, such as the low productivity that inhibits the country’s growth.

“We are discussing what the fiscal target will be, whether the Selic rate is at the correct level or not. Obviously, there is no way to grow without fiscal responsibility and controlled inflation, but they are not enough”, he says.

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THE PILLARS OF THE CREDIT AGENDA

The government divides the credit agenda and reduction of banking spreads, especially for companies, into five pillars:

1) Reduction in default

• Project that improves Bankruptcy Law (PL 3/2024): expands the participation of creditors in the process, establishes the figure of the fiduciary manager and facilitates the sale of assets, which tends to stop the process of deterioration in the value of these assets — which today compromises value recovery rates to honor obligations

• Extrajudicial execution (PL 6.204/2019): allows and provides guidelines for the extrajudicial execution of extrajudicial and judicial civil executive titles, which facilitates the seizure and evaluation of the debtor’s assets, the carrying out of expropriation and the payment of creditors

2) Capital market

• Reimbursement to investors (PL 2,925/2023): provides for civil liability of administrators in the event of accounting fraud. It also expands the powers of action of the CVM (Securities Commission), the sheriff of the financial market

• Legal interest regime (PL 6,233/2023): standardizes the application of interest in debt contracts in which the rate is not agreed and in non-contractual civil liability. It also standardizes the legal fee applied within the Judiciary, potentially reducing disputes surrounding the calculation of these charges

3) Banking sector

• Bank resolution project (PLP 281/2019): improves extrajudicial liquidation, creates a stabilization regime for systemically important institutions and determines the order in which resources are used in cases of need for help, starting with the private resources of shareholders and subordinated debts, reaching public funds only as a last resort

• Financial market infrastructures (PL 2,926/2023): improves the distribution of competencies between the Central Bank and CVM, in addition to stimulating competition and increasing the efficiency of operations between financial institutions.

4) Insurance

• Insurance cooperatives (PLP 101/2023 and PLP 519/2018): expands the modalities in which insurance cooperatives can operate, stimulating market competitiveness and increasing the offer for consumers and smaller-scale segments

• Insurance contracts (PLC 29/2017): establishes general law for insurance contracts and gives more protection to policyholders, with greater certainty that compensation will be honored

5) Regulation of tax reform

• Government intends to propose a model for VAT (Value Added Tax) in the financial sector that is non-cumulative and reduces the cost of credit. The idea is to grant presumed credit to the company taking the loan, which can be used to reduce taxes payable.