Cecilia Machado: Loan at Auxílio Brasil is the exchange of two dinners for one lunch

Recently approved in both houses of Congress, but awaiting presidential sanction, the consigned loan for Auxílio Brasil beneficiaries is the latest change in the protection network for the vulnerable population. At first glance, the idea seems promising: access to credit broadens the range of choices made by poor families, allowing each of them to assess their own needs in indebtedness decisions. Considering that the payment is deducted directly from the benefit – that is, the risk of default is lower –, the interest rates on this type of loan should be more attractive than those practiced in the market.

But preliminary investigation carried out in this Sheet and government estimates indicate that interest for this modality should reach 79% per year. In comparison, rates for INSS retirees range from 20% to 30% per year, about twice the economy’s reference rate (Selic). The differential indicates that there is a greater risk of default among Aid beneficiaries, since there are enormous uncertainties about the value of the benefit over time – such as the monthly installment, whose minimum of R$ 600 is temporary and is valid only until the end of the month. 2022–, the permanence of families in the program or even eventual changes in the rules of Auxílio Brasil and the consignment.

The biggest criticism of directing credit to the poor comes precisely from the fact that the costs of this financial service are very high for this part of the population, considering the low prospects of entering the labor market and of additional income gains that can be used to debt repayment, as beneficiaries depend on aid for basic needs. In other words, it is quite difficult to argue in favor of smoothing consumption over time for families living in minimal subsistence conditions.

But if the loan conditions that are configured in this market are in fact so unfavorable, what would lead Aid beneficiaries to adhere to this predatory credit modality? One possibility is that people have different levels of understanding of how to establish a healthy relationship with financial products. In the case of Aid beneficiaries, low education, combined with pressing needs, obliterates rationality in the conscious use of consigned credit.

This view is in line with the latest results from Pisa (2018), which show that 68% of young people up to 15 years of age have not reached the basic level in mathematics, considered by the OECD to be the minimum necessary for them to fully exercise their citizenship.

The Central Bank itself, in its Financial Citizenship report, echoes the view that the offer of financial products and services to vulnerable citizens needs to be accompanied by initiatives that seek to mitigate risks related to the lack of understanding and low knowledge of these customers to analysis and financial decision making.

According to the statistics in the report, the default rate is higher among the poorest, and the commitment of 50% of income to debt service (an indicator of risk indebtedness) reaches 12.3% of the indebted population that receives up to R$ 1,000 a month.

It is hardly evident that a payroll loan that compromises the minimum subsistence values ​​of poor families in the future is a good path to pursue. The offer of payroll-deductible loans to this population can be harmful to the welfare of beneficiaries even when it expands their options.

It allows Aid recipients to make the incoherent exchange of two plates of food in the future for one more plate of food in the present. Does this type of anticipation of resources, in the face of a focused expansion of assistance for those in need, make sense? How to justify the anticipation of Auxílio Brasil resources in such unfavorable conditions, whose effects would only be felt over the next few months? It certainly does not appear to be a pro-poor policy.