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Brazilian credit fintechs at risk of rapid bad loan accumulation, Moody's warns

Credit financial technology firms in Brazil have a customer base that is highly susceptible to economic downturns, Moody's said in a report, warning that the country's fintechs have little to no cash liquidity to navigate a potentially prolonged period of sharply lower sales.

Although fintechs will have better access to liquidity under new measures announced by Brazilian authorities, extending loans in a stressed environment with higher credit risk will challenge their risk management capabilities, according to the rating agency.

"Depending on the length of the coronavirus-related economic downturn and speed of recovery, fintechs' problem loans could rapidly accumulate and test these firms' limited loss-absorption capacity and more lax regulatory framework," Moody's said.

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Measures recently announced by Brazil's national monetary council allow credit fintechs to issue credit cards, sell securitized loan portfolios to a wider range of investment funds and tap funding from state-run development bank Banco Nacional de Desenvolvimento Econômico e Social.

Funding capacity has always been a key constraint for Brazilian credit fintechs because of their reliance on loan sales to specific investment funds and on capital raised in local markets or from predominantly foreign equity investors. These funding alternatives have dried up somewhat in the current coronavirus-driven downturn, Moody's said.

Brazilian regulators have also lowered credit fintechs' provisioning requirements for loans renegotiated by September 2020, which gives them more room to manage rising asset risks and potential liquidity shortages, the rating agency added.