The Credit Rating System of Brazil
Please read our extended interview with Marcos Fidalgo from Brazil’s Serasa organisation – the leading credit agency of its type in both South and Central America. We discuss some issues of particular importance for real estate and land investors with regards to Brazil’s ever-growing financial sector including the organisation’s experience; differences of the Serasa’s credit system compared to other parts of the world; Brazil’s current economic behaviour and its relationship with the credit industry; the growth of the credit market; availability of credit in the short, medium and long term; how Brazilian banks analyse loan applications; the future of Brazilian secured lending for overseas investors as well as using Serasa’s services and anti-fraud measures.
1) Many readers would be aware of the work of Experian as the organization is present in various parts of the world – can you explain the growth of ‘Serasa’ in Brazil? Serasa Experian is now firmly established as a leader in Latin American information services for support in the making of business decisions. In Brazil, it is synonymous with indispensible solutions for all stages of the business cycle, from prospecting to collection, thereby providing organizations with the best tools for their growth. Established in 1968, we have developed a deep understanding of the Brazilian market and as at June 2007, Serasa began operating as a subsidiary of Experian plc. which has enabled us to take use their global experience become the largest credit agency in the Latin Americas. As of today we are receiving over 4 thousand daily enquiries and are assisting 400,000 companies on a regular basis. We are also the largest certification authority in Brazil, providing all types of digital documents and customized solutions for the application of up-to-date technology – enabling businesses that use our services to be more secure, agile and profitable. As an organisation that continues to develop innovative solutions, we now cater towards all aspects of Brazil’s credit system as well as providing systems for businesses to improve their marketing, risk analysis, fraud prevention and decision making.
2) Are there any idiosyncrasies of the Serasa credit rating system that investors and business owners should be aware of? Whilst we adopt the strict international standards established by the Experian group, we do have to take an individualistic view on the Brazilian consumer market place. For example, we have an in-house team of mathematical modelling specialists who can identify, using highly refined methods, those with a high propensity to buy; maintain credit levels and are less likely to default. Our methodology also takes into account the relatively young nature of the Brazilian credit market (in relation to most developed countries) together with detailed data that we collect on a daily basis which will enable us to ensure that we can keep an historical record of each individuals credit behaviour – this is something which is and will be fundamental in the ever-growing market place. We can also provide bespoke business-specific modelling where we can assist with marketing and ensuring our clients are targeting the right type of customer (see below).
3) How do Serasa works with the major banks and credit organizations in Brazil? We work with the major banks of Brazil to ensure that any client that is making an application will be able to maintain any credit agreement that they enter into (be that short, medium or long term). The process is quite simple: an application is made (either direct at the bank or online) and our systems are able to inform the bank or lending organisation whether he/she has any bad credit history (missed bill payments, court judgments / actions, owed money to Brazilian private and public institutions etc.) or other issues of concern. Whilst Brazilian banking institutions are keen to develop the market, the standards that are applied working alongside the Basel banking supervision accords – this means that not everyone who applies for credit will necessarily be successful.
4) The credit and banking system in Brazil has become well-recognised worldwide due to its resilience during the global financial crisis – why do you think this is? From a macroeconomic point of view, Brazil has accumulated over $US 200 billion dollars in international reserves, providing a buffer to cope with the problems of the major external crisis. Furthermore, the leverage of Brazilian banks is low compared to those of the majority of developed countries; our credit industry is very young; the ‘sub-prime’ concept is non-existent here in Brazil (in a formal manner as what existed in countries like the USA and the UK); we have record savings levels and several other factors have all contributed to our financial sector not suffering as much.
5) As a likely growth we are seeing in the credit market in coming years? Despite the effects of negative GDP during the global economic crisis, between 2004 and 2009, credit transactions in Brazil have grown by 122 percent. Whilst controls have recently been put in place to control excessive credit growth (such as the recent SELIC interest rate increases and greater regulatory controls), it is almost certain for this trend to continue: industry estimates are pointing to a growth rate of 20% per year for the next two years for both unsecured and secured lending. The major credit card organisations have no intention of slowing down and the thirst to borrow in Brazil is growing by the day.
6) With more banks and credit agencies entering the Brazilian market – is there likely to be cheaper credit available? The cost of credit in Brazil is still quite expensive. This has been driven by an internationally comparatively high national interest rate (even though we witnessed a Brazilian low until recently) as well as factors such a heavy tax burden and lending organisations taking a cautious view due to the inexperience of the market in Brazil. However, measures such as the Cadastro Positivo (a system where borrowers who do not pay on time are listed in an entirely public and transparent manner) will help reduce default rates and encourage Brazil’s banks to take controlled risks when increasing their loan books. This is, in turn, will also encourage increased competition between the banks which should facilitate better borrowing costs for consumers.
7) What kinds of measures are being implemented to ensure that the lending in Brazil does not get out of control (as was the case in the U.S. and parts of Europe)? The effects on the credit crunch have by no means been underestimated by the Brazilian lending organisations and, even prior to the economic downturn, most have had the intention to maintain long term, sustainable and healthy loan books. The strict nature of our banking systems combined with increased international regulations (such as those announced under recent Basel rules, for example) will certainly control the frivolous lending practices which were a major contributor to the economic downturn.
8)Can you provide our readers with an outline of how a Brazilian bank would assess whether a person is eligible for a home loan? The process itself is very similar to accessing any other form of credit, however all home loan applications will have to be supported with a valuation report undertaken by a professional surveyor and a detailed underwriting verification process. This ensures that not only the lender knows that the security it is lending against is a solid one (so not too much is lent against it, for example) but also that checks on credit worthiness are undertaken to avoid potential problems of default. The major lenders also make it compulsory for mortgagors to have an insurance policy in place.
9) At the moment it is very difficult for foreign investors to obtain secured property finance in the country. Do you envisage a time when this will happen? Yes we do but, at present, it is very difficult to say when. As I have mentioned above, the Brazilian mortgage market is very young compared to most developed countries and, additionally, lending institutions have very prudent systems in place to protect their security. These processes (such as with regards to underwriting procedures) were created over the last couple of decades to protect the country against a reoccurrence of the financial turmoil we have experienced in the past and – from Serasa’s point of view – should be maintained in the long term. However, since rapid recovery of the Brazilian economy in 2009 our secure lending levels have reached record levels – a trend that certainly looks set to continue. It will therefore be a natural progression for banks to want to serve the needs of the increasing amount of property buyers from foreign shores. Yet it should be remembered that at the point at when Brazilian mortgages are available for overseas borrowers, it will be certain that a strict credit checking system will be placed on any applicant – debatably more so that what exists for Brazilian residents. Of course, this works in both parties favour: the bank / lender knows that their security is safe and the buyer knows that they are purchasing a solid asset that will serve them well in the future.
10) How can investors in real estate or land in Brazil make use of your services? We provide a vast range of highly sophisticated mechanisms for a range of business owners – below is what real estate and land investors can take advantage of:
Identification Checks: by using a Brazilians residents CPF (Cadastro de Pessoa Física) number we can assist with the verification of the following: full name, date of birth, marital status, sex, mother’s maiden name, address, telephones (up to 3), INSS number (Instituto Nacional do Seguro Social or National Institute for Social Security number), occupation and any companies owned (and, if so, the name, the nature of the business and its opening date).
Credit ‘Risk Scoring’: we use advanced statistical analyses to investigate the likelihood of a company becoming insolvent in the next 6 or 12 months on the basis of 22 classes of risk. Real estate investors would be able to use these, for example, to verify the default risk of a potential commercial or residential tenant as well as to examine the various aspects of a particular business decision (such as to know about the past history of a seller or party involved in the transaction).
Company Checking (Concentre): we have up-to-date access to the latest information on any company in Brazil including its structure, protests, liquidity, defaults, bankruptcies, lawsuits, tax deficiencies, commercial inconsistencies, any form of indebtedness and participation / involvement with other bankrupt companies. We source this information from the Official Judicial Offices spread across Brazil (Cartórios de Distribuição Judiciais); the Civil Courts (Varas Cíveis); the Notary Protestation Offices (Cartórios de Protestos); the Central Bank (Banco Central) as well as financial and non-financial institutions (instituições financeiras e não financeiras). Real estate and land investors would be strongly advised to check this information prior to allocating funds into any organisation in Brazil.
Credit Bureau (Monitore): another useful tool for real estate and land investors is to make use of our database containing the past credit history of over 170 million consumers nationwide (the largest database in Latin America). Each record provides an enlarged view (via a report) of each individual profile allowing people who access the system a wider view of previous defaults – including outstanding debt levels, the occurrence of protests, lawsuits, unpaid debts with financial institutions and companies, participation in business failure and previous bounced cheques (cheques sem fundos, CCF).
Assumed Profit Analyses: a pioneering solution that provides the estimated annual turnover of the impending fiscal year, enabling clients to assess the business / profitability potential of companies. It is calculated using the most advanced methods of mathematical modelling combined with constantly updated company behavioural studies.
RAROC (Risk Adjusted Return on Capital) Analyses: a system we have inherited from many prominent global banking institutions; real estate investors may want to use our risk management examinations when allocating capital to specific assets. This programme of analysis ensures that any such allocated funding is closely monitored and managed with its associated short, medium and long term risks.
Cheque Consultancy (ACHEI-Recheque®): Serasa can help with the verification of cheques, for example, before contracts are swapped – this is particularly important for real estate and land investors due to the valuable nature of the transactions they are undertaking.
Market Research: we can help real estate and land investors know exactly where their future customer is located (be that a home seller, a future tenant or other party of interest). This enables our clients to segment the market for robust and accurate analysis; identify the most likely prospects to enable a lower cost and higher return conversion and choose the best / most suitable areas to invest.
Portfolio Management: this allows clients with a spread of customers or assets to closely monitor the financial behaviour of their business interests. For real estate owners with portfolios, this allows them to manage and forecast their operations effectively whilst keeping close tabs on future risks. Examples of the practical application of our Portfolio Management tool include our ‘Scorecard Diagnostics’ system (where an overview and specific rating is provided based upon client behaviour); analysis and close monitoring of new clients; capital adequacy levels (using Basel II standards); analysis of payment collection methodology; ongoing potential improvement analyses and an events alerts system (such as important payment dates).
International Relations: as many Brazilian organisations have established overseas ties we are able to inform clients of information pertaining to previous business transactions, indebtedness, payment habits and financial appraisals so the past dealings of the organisation can be seen in and accurate, current and comprehensive manner.
Social and Environmental Responsibility Reports: the need for an increased consciousness with regards to environmental and social respect is encouraging an increasing amount of clients to view Brazilian companies’ commitments. We are able to provide a range of bespoke reports to assist clients’ investigations into these ever-important factors.
General Macroeconomic Reports: our economists provide specific reports which trace short-term perspectives essential to understanding the economic realities of the country including inflation, interest, volume of credit, levels of delinquency, employment / unemployment, exchange rates, balance of trade, international economics and seasonal factors that affect short term business decisions. For those with an interest in the finer details of the Brazilian macro-economic system, I would suggest seeing our ‘Serasa Cultural’ series – which works with the most prominent economics and finance university faculties to encourage research and development of the field.
Sector Profile Studies: with over 15 years of expert research, these tests have enabled us to characterize segments of the Brazilian economy. Using the country’s largest database on consumers, companies and economic groups we are therefore able to provide detailed and relevant analysis for real estate and land investment decisions.
Strategy Manager: our most advanced integrated management solutions often used by larger scale real estate investors and land developers in Brazil. Now in its third generation, we use our extensive experience in credit risk, portfolio analyses, fraud protection and customer billing to build with each client the most appropriate development plan to their bespoke business needs. Now in its third generation, the Strategy Manager has over 16 years of undertaking such research for some of Brazil’s largest companies.
Mosaic Brasil: particularly for the foreign real estate and land investor, a detailed understanding of the demographic characteristics of Brazilian society is imperative. Undertaken in joint partnership with the University of São Paulo (the largest and most prestigious higher education and research establishment in the country), Mosaic Brasil is a detailed breakdown of the Brazilian population into 10 groups within which are 39 segments based on income levels, geography, demographics, behaviour and lifestyle patterns. The system uses up-to-date research techniques and its model is now being replicated in several other developed and emerging nations. We have highlighted the 39 segments in a separate blog post which can be viewed by clicking here.
11) How can Brazilian investors and business owners protect themselves against the ever-sophisticated effects of fraud? Particularly with the growth of the internet in day-to-day transactions, business owners need to be ever vigilant of the unscrupulous practices being undertaken not only by consumers but also other businesses in Brazil. We have a number of clear and simple verification systems that can be take advantage of to mitigate the effects of such issues, including: cheque analysis (to confirm that it has not been halted, cancelled, stolen or misplaced); pending credit issues facing the consumer of business (such as court and other judicial hearings); protests; civil actions, previous bankruptcies; relationships with vendors (online complaints can be tracked, for example); taxation issues and as well as a fraud risk calculation and alert mechanism. Note that these tools can be quickly and easily accessed via our website.