The proposed project (the “Project”) consists of a 5-year (2 years of grace period) investment of up to BRL 480 million in senior quotas of Red Real FIDC (“Red Real” or the “Fund”), managed by RED Asset Gestão de Recursos Ltda (“RED Asset” or the “Fund Manager”), an existing IFC client. The Project aims to continue supporting RED Asset’s lending program to small and medium enterprises (“SMEs”).
IFC anticipates that the Project will support an increase in access to finance for Brazilian SMEs, helping to address an SME finance gap estimated at US$437 billion, the ninth largest gap among 128 developing countries, and approximately 25% of the GDP. Moreover, SME finance has decreased during 2020-2021 in a period of recession when banks were restricting their loans and going for less risk portfolios.
IFC anticipates that the Project will contribute to greater resilience in the SME finance market through demonstration and replication channels by unlocking alternative funding sources for lenders in the SME financing segment. The credit market in Brazil is characterized by a high degree of concentration where banks control the lion’s share with the top 5 banks responsible for about 70% of the total credit volume in the country. This market dominance enables banks to realize good profits dampening their appetite for targeting underserved segments such as SMEs. Worse still, banks perceive SMEs as a high-risk segment and retrench from this segment especially during stress periods such as the COVID-19 pandemic. This flight to quality phenomenon was evident during the pandemic as there was a decline of approximately 3% in the share of SME financing by commercial banks in 2021 to 61.7% from roughly 64.7% in 2020.
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