Principal investigator: Viviane Pires Ribeiro
Article title: THE EFFECT OF ORIENTED PRODUCTIVE MICROCREDIT IN BRAZIL: INCENTIVE TO DEFAULT?
Article authors: Wandnéia da Penha Magdalon and Bruno Funchal
Location of the intervention: Brazil
Sample size: 49 observations
Major Sector: Finance
Type of Intervention: Relationship between the amount of productive microcredit directed towards strategic default in Brazil and strategic default rates.
Primary variable of interest: Strategic default
Evaluation method: Experimental Evaluation (RCT)
Evaluation Context
In 2004, with the aim of expanding microcredit in Brazil, the Brazilian government issued Provisional Measure 226, which established the National Program for Productive Microcredit (PNMPO), later converted into Ordinary Law 11.110/05. This program aims to provide resources for Productive Microcredit (MPO), with the institutional objective of encouraging job and income generation among formal and informal micro-entrepreneurs with an annual gross income of up to R$ 120. Therefore, the vast majority of informal entrepreneurs might not possess financial assets to offer as collateral. Thus, according to Article 2 of Law 11.110/05, the granting of MPO is permitted without the requirement of real guarantees, which are replaced by alternative guarantees to be defined by the operating financial institutions.
Intervention Details
Da Penha Magdalon and Funchal (2016) analyze the impact of the public policy of inserting credit into the market on the default rate of productive microcredit oriented towards Law 11.110/05, which instituted the PNMPO (National Program for Productive Microcredit). Using aspects of asymmetric information, the authors seek to understand the potential incentives for default generated by the design of the MPO contract, since the lack of clear punishment in case of non-payment would tend to produce incentives for moral hazard.
The data used in the research were collected from the websites of the Central Bank of Brazil and IPEADATA. The information is aggregated nationally and is presented as a time series, covering the period from January 2011 to April 2015, totaling a sample of 49 observations. From the Central Bank's website, information on credit with resources directed to individuals – microcredit for consumption and micro-entrepreneurs – was used to measure MPO (independent variable). Data relating to the default rate (dependent variable), CDI and inflation index were also collected from the Central Bank, and unemployment and income rates from the IPEADATA website.
Methodology Details
This research aimed to test whether the granting of targeted productive microcredit encourages default, using a multiple linear regression model. The model used the independent variable for granting the targeted productive microcredit with a time lag of t-1, because, according to the authors, default on targeted productive microcredit is not instantaneous. That is, the first payment delay only occurs one month after the loan is granted.
The econometrically estimated multiple linear regression model – to test the hypothesis that default is positively related to the increase in the amount of MPO (Minimum Loan) – was represented by the following variables: Default in MPO granting; Monthly amount of MPO grants; Unemployment rate; Average real income of employed people; Interbank Deposit Certificate (CDI) interest rate; and National Consumer Price Index (IPCA).
The regression equation contains four control variables, three of which relate to economic indicators – unemployment rate, average real income, and IPCA (Brazilian consumer price index) – and one interest rate indicator, the CDI (Brazilian interbank deposit rate).
Results
According to the authors' findings, the default rate for consumer microcredit has a non-significant relationship with the granting of consumer microcredit. The F-test probability of 0,0259 indicates a strong correlation between the model variables for a significance level of 10%. Therefore, it is found that consumer microcredit default is not related to increased credit; that is, credit granted outside the scope of Law 11.110/05 does not impact the increase in default rates for consumer microcredit.
The results indicate a statistically significant positive correlation of 0,0067 between default rates and the granting of micro-entrepreneurial loans. It was estimated that for each unit increase in the granting of micro-entrepreneurial loans, the default rate in this portfolio will increase by 0,0067%. Thus, for a growth of 100 million in loans, the projected increase is 0,67% in the default rate, representing a relative growth of 18,30% in the average default rate for the period from January 2011 to April 2015.
The authors calculated an average increase in MPO of more than 250 million when the sample is divided into two parts. This increase in MPO volume would imply an average increase of 1,67% in delinquency, which justifies an increase of almost 80%, compared to the average delinquency level (2,08%) at the beginning of the observed period.
Statistics show the relevance of the impact of Public Policy on default rates in microcredit for consumption, confirming the research hypothesis. This significance was not observed for default rates in microcredit granted for consumption. Default rates explained by macroeconomic factors, such as unemployment rates and inflation, are not significant in the model. Therefore, there is evidence to confirm the research hypothesis that microcredit encourages default through moral hazard, given the borrower's limited responsibility to fulfill their part of the agreement, since there is no harsher penalty in the contractual arrangement.
Lessons in Public Policy
Research conducted by Da Penha Magdalon and Funchal (2016) shows a positive relationship between default rates and the volume of productive microcredit, suggesting that this type of debt contract encourages moral hazard problems and illustrates the economic consequences of poorly designed contracts and laws. In this sense, the research confirms previous studies that highlight the importance of credit agents' actions in expanding microcredit activities throughout the country. Thus, the direct relationship between the credit agent and the client at their place of activity, along with follow-up throughout the contract's term, is fundamental to resolving moral hazard problems. In turn, the social guarantee provided by solidarity groups reduces the risk of adverse selection in productive microcredit contracts.
Da Penha Magdalon and Funchal (2016) state that, based on the results, actions can be suggested to revise the way the law regulating microcredit is written, introducing counter-measures or guarantees that encourage debt repayment and discourage strategic default. Furthermore, the authors suggest, for example, research among the main institutions operating the National Microcredit Program (PNMPO) to verify whether, in practice, there is indeed monitoring by the credit agent during the term of the contract, as well as technical guidance; whether the borrowed funds are actually being used in the business that is the object of the microcredit; whether there are sufficient credit agents for this purpose; whether they are technically qualified to provide guidance on the financial planning of the business; and, finally, whether these agents are fulfilling their role, as defined by Law 11.110/05, or whether they are omitting relevant information.
Reference
DA PENHA MAGDALON, Wandnéia; FUNCHAL, Bruno. The effect of oriented productive microcredit in Brazil: Incentive to default?. BASE - Journal of Administration and Accounting of Unisinos, v. 13, no. 4, p. 294-308, 2016.
