The effect of oriented productive microcredit in Brazil: Incentive to default?

Abstract

This paper aims to analyze if the expansion of oriented productive microcredit (OPM) stimulated strategic default. This type of microcredit consists in a lending for low-income people to use exclusively in economic activity focused on promoting the generation of employment and income, and requires no collateral, defining, at least in theory, guidance and monitoring by the loan officers. Using aspects of asymmetric information, we aim to understand the potential incentives default generated by design-oriented productive microcredit contract. The lack of clear punishment in case of non-payment would tend to produce incentives for moral hazard. Thus, the hypothesis to be tested is whether the default is positively related to an increase in the amount of oriented productive microcredit. As a methodological approach, OLS models were used, where the volume of oriented productive microcredit would be the main explanatory variable of default, in addition to controls related to macroeconomic variables. The results show a positive relationship between default and the volume of oriented productive microcredit, suggesting that this type of debt contract induces problems of moral hazard, illustrates the economic consequences of contracts, and poorly designed laws.

Keywords: Oriented Productive Microcredit, default, Moral Hazard, financial intermediation, credit access.