Lending To Fight The Pandemic

COVID-19 crisis is in the process of delivering a global recession, as governments around the globe keep sustaining the (much required) lockdown measures to “flatten the curve” and alleviate the impact on health systems. The immediate economic effect of these restrictions is in the real economy, generating both a cash crunch for SMEs and individuals, and a surge in the cost of uncertainty. The longer the crisis lasts, the bigger the impact.

There is no off-the-shelf cure for the complex economic effects of the COVID-19 crisis, but credit is definitely at the center as a key enabler to lessen the burden on individuals and companies. Understanding how the COVID-19 crisis will change Retail credit in Brazil is critical for lenders to address the upcoming challenges, calibrating the credit supply with a changing demand and adequately responding to government stimulus.

In this report we draw from the learnings of previous crises and the initial COVID-19 answer to discuss:

1. How the dynamics of Retail Credit will change in Brazil: the new crisis arrives in the expansionist part of the credit cycle in Brazil, after a slow and long-waited recovery, which is particularly concerning for Retail lenders. Despite surging demand for cash from borrowers and prospects, we expect (and start to observe) little appetite from lenders in supplying the much needed credit. Stimulus packages announced by the local authorities help mitigate, but not avoid the cash crunch that individuals and SMEs are facing.
2. What should lenders do now to respond: Individual lenders and the government will have to work together to provide aid and fuel the economy, with the required guard-rails to maintain the stability of the system. Lenders should start now in emergency mode to (i) provide urgent aid to borrowers, and set up an immediate response focused on (ii) financial impact scenarios, (iii) a new COVID-19 credit playbook, and (iv) coordinating the relief effort.

Financial institutions need to be proactive in responding to the pandemic, delivering solutions to the society – and their own future.