Caixa chief deflects on job security as Sim Digital defaults hit 88%

Maria Rita Serrano, the president of Caixa Econômica Federal, had reached the limit of her patience. For fifty days, she said, she had been asked the same question: whether she would keep her job. The answer, she made clear during a second-quarter earnings call, was not hers to give. "The question should not be asked to me," she said, her irritation evident. "It should be asked to my boss, the president of the Republic." The speculation about her future was not baseless. President Luiz Inácio Lula da Silva was studying a ministerial reshuffle, and Serrano's departure was widely considered inevitable. The leading candidate to replace her was Margarete Coelho, a former deputy and lawyer with ties to Arthur Lira, the speaker of Brazil's lower house.

But Serrano's frustration about her job security was overshadowed by a far more pressing problem facing the bank: the catastrophic failure of a microcredit program that had spiraled into a debt crisis. The Sim Digital initiative, launched in the final weeks of Jair Bolsonaro's presidency just before the 2022 election, was designed to provide small loans to low-income Brazilians. It had instead become a cautionary tale about the dangers of rapid credit expansion without adequate safeguards. The default rate had climbed to 88 percent on a portfolio of roughly 2.9 billion reais. Henriete Bernabé, the bank's vice president for risk management, called the program "controversial" because it had encouraged indebtedness among vulnerable populations. The default rate had worsened since the start of the year, when it stood closer to 80 percent.

The scale of the damage extended beyond Caixa itself. The FGTS, Brazil's worker severance fund, had been tapped to provide capital for the Sim Digital loans and had absorbed losses exceeding 2 billion reais when borrowers failed to repay. Yet Caixa itself had been shielded from direct losses through a guarantee mechanism. The Fundo Garantidor de Microfinanças, a guarantee fund, was contractually obligated to cover the bank's losses from defaults. In the first half of 2023 alone, the fund had transferred approximately 570 million reais to Caixa to compensate for unpaid loans. "There is no loss to Caixa at this moment because of Sim Digital," Bernabé stated flatly.

Serrano made clear she would never have approved either Sim Digital or the consigned lending program tied to the Auxílio Brasil welfare benefit had she been leading the bank when they were created. Both programs, she said, were "questionable." Upon taking office, she had ordered internal audits to verify that risk controls had been properly followed. The damage, however, was already done. The broader credit portfolio of Caixa showed the strain. The bank's overall default rate had reached 2.79 percent at the end of the first half of 2023, up from 1.89 percent a year earlier.

There were glimmers of hope on the horizon. Bernabé predicted that the consolidated default rate would stabilize during the third quarter and begin declining in the fourth quarter, assuming household finances improved. The Desenrola Brasil program, a debt restructuring initiative, was expected to help. Through Desenrola, Caixa had negotiated roughly 1.5 billion reais in debt relief for more than 70,000 customers, allowing 89,000 contracts to be regularized. Despite the credit headwinds, Caixa's bottom line remained strong. The bank reported net profit of 2.6 billion reais in the second quarter of 2023, a 40.9 percent increase from the same period the previous year. For the full first half, profit reached 4.5 billion reais, up 3.2 percent year-over-year, driven largely by growth in the credit portfolio. The question now was whether that growth could be sustained as the legacy of Sim Digital continued to weigh on the bank's risk profile and as Serrano herself waited to learn whether she would be around to manage the fallout.