Microfinance faces debt test in Brazil

In the shantytowns that surround Brazil's cities, plenty of peddlers and vendors say they could use a small loan. The trouble for microfinance lenders -- who believe loans as small as US50 can help poor entrepreneurs grow business and climb out of poverty -- is that many would-be borrowers in South America's largest economy are already loaded with debt.
With some of the world's highest interest rates, Brazil is fertile ground for aggressive commercial lending. And after decades of hyperinflation, rich and poor have learned that it's smarter to spend than invest.
Brazil seems like the perfect place for microfinance, a development strategy that emerged in the 1970s. As microfinance rides a new wave of global attention and more private capital flows into the segment, lenders may want to consider what went wrong in Brazil. Globally, cross-border investment in microfinance tripled in the last two years to $1.4 billion. Microlenders sold shares, private funds invested and even profit-driven giants like ABN Amro and Citibank started taking an interest.
But critics have slammed private capital's arrival, saying loans can hurt poor people by encouraging them to consume beyond their means and charging them interest to pile on debt.
Stores hand out credit cards, banks cash post-dated checks, and retailers sell everything from TVs to T-shirts on payment plans with high interest rates built into the price.
At the other extreme, the government sets limits on lending rates charged by nonprofits and offers discounted loans -- which often go unpaid, causing federal debt and market rates to rise.
In an effort to expand microfinance services to the poor, President Luiz Inacio Lula da Silva's government decided in 2003 that banks must invest 2 percent of sight deposits in microfinance at capped interest rates.
The move has created a pool of domestic capital, but critics say the measure simply encourages banks to make loans to slightly poorer clients without doing the hard work required to reach the neediest and to make sure loans are used productively.
Real Microcredito, founded by Dutch bank ABN Amro a few years ago, serves a growing number of hairdressers and shop owners in the outskirts of Sao Paulo, one of the world's five biggest cities.
General Manager Giovani Anversa estimates Brazil has some 10 million potential micro borrowers and he expects competition for their business to grow.
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