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Moody's: Brazil's new measure allowing employee fund as loan collateral a credit positive for banks

A new provisionalmeasure in Brazil that will allow the use of up to 10% of the employee indemnityguarantee fund, known as FGTS, as collateralfor payroll-backed loans is credit positive for Brazilian banks, Moody's said.

In an emailedstatement, the rating agency noted that the collateral mitigates the risk of loanlosses in the event of layoffs, which has discouraged the development of privatesector payroll loans. "Because banks will have more security on private-sectorpayroll loans, the volume of these loans is likely to increase," Moody's said.

"At thesame time, the interest rates banks charge on this product (currently 44% per year,on average) will gradually decline toward the rates charged on payroll loans topublic-sector employees, which currently average around 28%."

Meanwhile, thebanking industry is also reportedly working on a proposal that would enable large-scaleuse of payroll-backed loans by employees in the private sector. Banks will reportedlyask for an easement ofthe capital allocation requirements for this type of loan, claiming the measurecould boost credit offerings by up to 25%.