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Brazilian FinTechs Under Pressure as Delinquency Rates Soar

Sao Paulo, Brazil

Brazilian FinTech firms are reportedly grappling with a surge in loan defaults, leading to a crisis in the asset-backed credit market.

The delinquency rates on unsecured loans offered by companies like Open Co, Nexoos and Gyra+ have exceeded 60%, prompting measures such as mergers, downsizing expansion plans and asset sales, Bloomberg reported Monday (March 27).

This wave of defaults is impacting the receivables investment fund (FIDC) market, a key source of affordable financing for Brazilian firms, according to the report.

The delinquency rates in the FinTech FIDC market hit an average of 9.5% in January, a stark increase from 3.5% six years ago, the report said, citing figures from data provider Uqbar.

The high delinquency rates are largely due to Brazil’s sluggish economic growth and persistently high interest rates, per the report. FinTechs, which gained traction by promising to democratize lending in a country where credit access has been historically challenging, are now facing a surge in defaults as interest rates have soared to double digits.

The ripple effect of these defaults extends beyond the FinTech industry, impacting the broader FIDC market, a vital financing source for small businesses, according to the report. Despite the hurdles FinTechs face, the overall FIDC market in Brazil has been growing, with FinTech FIDCs witnessing a 25% growth in the year leading up to January.

Open Co, a prominent FinTech company formed through a merger of Geru and Rebel in 2021, and backed by investors like Goldman Sachs and SoftBank Group Corp., has seen significant defaults on its FIDC, with a delinquency rate of 63%, the report said. Other FinTechs like Nexoos and Gyra+ are also grappling with high delinquency rates on their FIDCs.

The challenges for these FinTechs are exacerbated by their lack of traditional debt collection mechanisms and the fact that many of their clients are new to credit, making default prediction and preparation difficult, per the report. In addition, customers are prioritizing repaying banking institutions they have longstanding ties with.

It was reported in May 2023 that 40% of the adults in Brazil were at risk for debt defaults at a time when the country’s household debt was hovering near record highs and the government had raised interest rates around a dozen times.

The steep borrowing costs were also putting pressure on businesses and leading to costlier local debt markets.