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Fitch: Brazil's alternative lending market faces tighter regulatory scrutiny

Brazilian regulators are on the watch for the country's growing alternative lending market, especially credit cooperatives, Fitch Ratings said.

Cheaper sources of lending are on the rise as the challenging operating environment in Brazil takes a toll on traditional banks, whose lending rates have remained high. Aside from fintechs, one of the booming institution types are the credit cooperatives, whose lending rates fall between 70% and 75% of personal loans at traditional banks.

Brazil's two main cooperatives, Sicoob and Sicredi, accounted for about 80% of the total assets of the cooperative system in December 2016. Their assets account for only 1.7% of the total for Brazil's financial sector, but they grew by 48% between 2014 and 2016, Fitch said.

Recently, regulators have introduced stricter requirements for the industry, including Banco Central do Brasils new rules regarding cooperatives' liquidity structure and capital risk management. This more stringent supervision is aimed at ensuring cooperatives remain robust and safe, Fitch said, adding that it "understands that it is easier to implement rules [or] procedures for large groups than for independent cooperatives not linked to cooperative systems."

The rating agency believes the regulation of cooperatives and fintechs is a "healthy and welcome" development as they can strengthen the loan framework in the long term by complementing traditional credit but at a lower cost.

Fitch added that Brazil's credit cooperative market will see further consolidation even if the lack of competition can lead to some obstacles to entry. "Potential liquidation of small and single cooperatives is unlikely to lead to liquidity or reputational risks to large groups — which have robust systems and controls [and] risk monitoring."