The majority of small and medium-sized banks in Brazil have stoppedgranting new payroll-backed loans to public servants in the states of Rio de Janeiro,Tocantins and Amapá due to a spike in payment delays, O Estado de S. Paulo reported, citing a report from local banking associationABBC.

The financial institutions plan to file lawsuits against thethree states as the banks allege that the governors of such states are misusingtheir employees' payroll loan payments to balance their own fiscal budgets. Accordingto ABBC, the delays vary from one to five months and the total amount in arrearsdiffers depending on the bank.

"The government paid employees, deducted the amounts duefor payroll installments and did not pass them on. It was a misappropriation,"Banco Pan SA commercialdirector Alex Sander Moreira Gonçalves said, according to the July 16 report.

The Public Ministry in the state of Tocantins launched an inquiryJune 28 to investigate the deviation of payroll loans payments of civil servantsin the state. A spokesman at the institution told S&P Global Market Intelligencea preliminary investigation began in March and has allegedly found evidence thatsuggests "the state of Tocantins has been making payroll deductions, relatedto payroll loans, without proceeding with the transfer of the amount due to financialand banking institutions."

As allegations are confirmed, the Public Ministry "willadopt the appropriate judicial and extrajudicial measures," the source said.

According to the O Estadode S. Paulo report, the misuse of payroll loan funding has affected 17 financialinstitutions in Tocantins, including CaixaEconômica Federal, Banco Pan, BancoBradesco SA and Bancodo Brasil SA, even though the latter denied irregularities in such transactions.

Payroll loans for civil servants were at 170 billion Brazilianreais in May, according to data from the BancoCentral do Brasil, the publication noted.

As of July 15, US$1 wasequivalent to 3.27 Brazilian reais.