In 2020, Brazil's congress passed an amendment to the law governing the length-of-service guarantee fund (FGTS) to allow individuals to withdraw money from the employer-contributed saving scheme in the month of their birthday.
In much the same way as Chile’s government liberalized their national pension funds to enable withdrawals – as a means to boost personal consumption and grow the economy – the rule change instantly created a new form of collateralized credit in Brazil.
Some banks immediately started offering loans for up to 12 early annual withdrawals, with the payment being debited directly from FGTS account balances – instantly becoming the safest form of lending, as banks were lending against funds that existed.
It became popular, too.
These efforts feel half-hearted and there is strong sense that [these bankers] would welcome rule changes that would kill off FGTS loans
Such birthday withdrawals are growing fast, reaching around R$29 billion ($5.7 billion) in 2022 and R$21.2 billion in the first nine months of 2023.
These loans represent around 24% of total personal loan origination and 24% of total public-sector payroll loan origination – previously the safest form of individual credit – and they are running at around twice the level of private payroll loans.
By 2022, the FGTS fund, which is exclusively managed by government-controlled bank Caixa Econômica, had assets of R$655.4 billion. This compares with total Brazilian credit of roughly R$5,400 billion.
Reluctance
This rapid rise in FGTS loan disbursement comes despite a reluctance to embrace the product among the larger banks, which fear cannibalization of the unsecured personal loans segment.
And it is easy to understand this reluctance: whereas personal-loan interest rates average around 5.5% a month for the big banks – and with considerable variation: Santander Brazil averages around 7% a month, while Itaú is about 4% – banks are offering FGTS rates as low as 1.4% a month.
This creates quite the cannibalization risk for the big banks that dominate the personal loan market.
According to analysts such as Citi’s financial institutions analyst Rafael Frade, who says he has been “surprised” by the speed of growth in FGTS loans, the trade-off between banks skewing their portfolios to this secured product – and thereby reducing delinquency rates – and losing the net interest income (NII) from their existing personal loan portfolios is a poor one.
He says: “The rates offered in FGTS loans tend to be dilutive and make little sense in spite of solid asset-quality dynamics.”
So, where has the growth in FGTS loans come from?
Startups Banco Pan and Banco Inter, which have low exposure to personal loans, have ploughed marketing spend into FGTS loans – and to good effect. Inter began writing FGTS loans in the third quarter of 2022, and the segment has steadily increased, representing 5% of gross loans as of the second quarter of 2023, equal to R$1.2 billion.
In the case of Pan, the contribution to the gross portfolio peaked in the first quarter of last year at 13% of loans. Quarterly origination for the product is close to R$1.2 billion – around 20% of total origination – as of the second quarter this year, making portfolio sales a distinct possibility.
Half-hearted
Belatedly, some of the larger banks are responding. For example, Bradesco is trying to build FGTS origination through its digital platform Digio, which started selling the product in the middle of last year, with approximately R$1 billion financed.
Last month, Nubank said that it will start offering FGTS-backed loans through its app, too.
However, these efforts feel half-hearted and, speaking to bankers at these institutions off the record, there is strong sense that they would welcome rule changes that would kill off FGTS loans.
They may have philosophical allies in the government, who, for different reasons, are also fearful of the fast-growing credit product.
President Luiz Inácio Lula da Silva’s finance minister Fernando Haddad and work minister Luiz Marinho have publicly stated that they would like to do away with FGTS collateralization. Earlier this year, Marinho said he wanted to see an end to “birthday withdrawals” altogether.
Why are they so against a popular debt product?
Well, in the previous two Lula administrations, the FGTS was a source of funds for low-income housing through the government’s flagship programme Minha Casa Minha Vida (my house, my life). Today, the government wants to reinvigorate this housing strategy, which was widely seen as a success and an economic tailwind for GDP growth. Any attempts to use FGTS for other purposes – such as secured personal loans – can be seen as a threat to financing capacity for this programme.
It would be rare if such a popular, secure and fast-growing loan product were killed off by the government. But then again, it is also rare that the economic interests of large banks and the Lula administration are aligned to such a close degree.
But if both Brazil’s big banks and the government wish for an end to birthday loans, that could well come true.
