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Trust is at the root of the word credit. Without this basic element, it is difficult to imagine how the credit market would function. Complex and developed financial systems require, in addition to trust, objective criteria to back their operations. Guarantees fulfill this role, giving the system greater security.

There are different types of guarantees. They take the form of an asset or a voluntary obligation - in this case, involving a third party. In the event of default, the creditor can execute the assets pledged as collateral or charge the third party who agreed to guarantee the operation. These mechanisms work to mitigate the risk of default and make concessions less dependent on the subjective criterion of trust.

Each guarantee instrument has its own liquidity and execution cost. These characteristics determine the higher or lower quality of the guarantee. In the Brazilian credit market, the regulation of guarantees is still a bottleneck. It is in this context that the timely discussion on the new collateral framework arises, through the Bill 4.188/2021.

The diagnosis of the Brazilian guarantee system usually highlights the high costs and time spent on enforcement proceedings, as well as legal uncertainty. If a transaction receives a real guarantee (for example, real estate), but the recovery process is lengthy and uncertain, the guarantee loses importance as an instrument to mitigate the risk of default. This is one of the aspects on which the framework aims to act.

Another difficulty often pointed out is the under-utilization of assets pledged as collateral. Currently, a property can only guarantee one transaction, even if the value of the transaction is much lower than the value of the property pledged as collateral. This under-utilization occurs at the same time as consumers resent the lack of collateral to cover other operations, which shows a less than efficient use of these resources.

What if the same asset could guarantee more than one operation? This possibility, which makes guarantees more efficient, is provided for in the new framework, which intends to create the figure of the Guarantee Management Institutions (IGG). These institutions will be private and will be responsible for managing guarantees in the form of movable and immovable property, facilitating the sharing of credit operations with one or more credit grantors.

In practice, a consumer who has a property will be able to have it appraised and take out a guarantee limit by paying a fee to IGG. As long as they have a balance, this guarantee limit will be available for use in different operations.

The GGGIs will be responsible for evaluating the real assets pledged as collateral, which should speed up the credit process. As a result, banks will be relieved of the assessment burden and will be able to focus on their core business, which is granting credit.

The new framework promises to have an impact on the supply of credit, increasing the participation of fintechs, peer-to-peer platforms and cooperatives. Under the current model, these institutions adopt a more conservative stance when assessing risk. With the security provided by guarantees, the tendency is for these institutions to start considering audiences associated with a greater risk of default.

But the benefits go beyond credit expansion: the impact on interest rates has been documented in 2019 study by the Central Bank. By comparing the same group of clients, and operations with a similar value and term, in order to try to isolate the impact of guarantees on the cost of credit, this study showed something that was already intuited: interest rates on unsecured personal credit operations were twice as high as those on secured operations.

O Brazilian credit market has an information system that is recognized as efficient and capillary, providing both positive and negative information through the credit bureau sector. This diagnosis was made by the World Bank in its well-known ranking of the ease of doing business. At the time, this same diagnosis identified an opportunity to improve the guarantee system in order to increase access to credit. The time has come to modernize this system, bringing it into line with the best international practices.

Credit guarantees

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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor