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Proposed changes to Brazil bankruptcy law could boost loan growth, Fitch says

A bankruptcy law reform recently proposed by Brazil's government could enhance the legal framework for local credit, which would provide more support to banks and their loan growth, Fitch Ratings said.

Under the current legal framework, companies that resume operations after going through a restructuring process can make dividend payments upstream before fully repaying their restructured debts with banks. Possible limitations on the allocation of resources by restructured firms could provide more comfort to lenders, Fitch said.

Other important changes under discussion include government treatment of taxes for companies under bankruptcy protection, the rating agency noted, adding that the possible creation of specialized courts to judge such cases is also important.

Another crucial proposed change is the treatment of the fiduciary alienation guarantee when a company files for bankruptcy protection.

Currently, a bank with fiduciary alienation as guarantee has the right to receive the property even if the company has already filed for bankruptcy. It is yet to be determined if the guarantee under the fiduciary alienation regime also enters into the bankruptcy process under the updated rules. If this happens, Fitch believes banks could lose the strong guarantee, which might ultimately increase the cost of credit even for this type of guarantee.

The rating agency pointed out that Brazilian banks currently have on hand around 10 billion Brazilian reais worth of repossessed assets as collateral for unpaid loans, with the majority relating to real estate.

It added that bankruptcy protection filings in Brazil increased 44.8% in 2016 from the previous year, with the majority of those requests coming from small or medium-sized enterprises.

"Fitch anticipates credit growth of 4.7% for the sector by year-end 2017. Should the government's measures … be implemented quickly, this growth could accelerate, although the positive effects are more likely to be perceived starting in 2018 and thereafter," the rating agency said.

As of April 3, US$1 was equivalent to 3.12 Brazilian reais.