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DISCOUNTING OF RECEIVABLES AT BRAZILIAN COMMERCIAL BANKS

20 November, 2015 - 17:25

Traditionally, the most prevalent form of short-term financing for a company such as Morris was to discount receivables, with recourse, at Brazilian commercial banks.

The normal range of terms on trade bill discounts was 30 to 120 days, although occasional 180-day operations were observed. The range of nominal rates was 9 to 11 percent per month, including a 0. 125 percent tax on financial transactions, all of which would be tax deductible. However, with the prevailing practice of charging upfront commitment fees and requiring compensating balances of 25 to 35 percent, the effective rate was approximately 395 percent per annum. Given the fact that firms need some balances to back up their day-to-day operations, the effective rate of interest would be less because the actual required compensating balance was not quite as high as it seemed to be.

The major drawback with this method, however, was that local banks did not have an abundant supply of cruzeiros. Because of the tight monetary policy of the Brazilian government, both in the form of a 35 percent reserve requirement and other restrictions on the use of demand deposit funds, commercial banks often had a limited amount of funds they could make available to a client for the discounting of receivables. Compounding the problem was the fact that foreign-owned subsidiaries in Brazil faced official restrictions on lending, since the Brazilian government reserved 75 percent of commercial bank loan portfolios for privately owned local firms, which forced foreign-owned companies to compete with state agencies for the remaining 25 percent of the domestic credit supply. As a result, firms with large sales volumes and large working capital needs, as in the Morris de Minas case, would find it extremely difficult, if not impossible, to set up such large discount lines, even considering the use of a large number of banks. Adding to this, Albuquerque felt that the local subsidiary should not enter into discount agreements with more than twenty local banks because of the complications that almost certainly would arise from this expedient. In consequence, he felt that the firm should not count on raising more than half the required amount in this manner.

It was also possible to discount Morris' receivables with recourse at local private finance companies, which were the normal sources of credit to consumers, and which were somewhat less constrained by government regulations.

Albuquerque's assistant had computed the cost of discounting the receivables to be, on the average, approximately equal to 494 percent per annum. All of this cost would be deductible in computing profits subject to Brazilian corporate taxes, which for Morris de Minas would be approximately 45 percent.