By Tatiana Bautzer and Carolina Mandl
SAO PAULO (Reuters) - Most of Brazil's small businesses, which account for more than half of its jobs and 30% of gross domestic product, are not getting the cash President Jair Bolsonaro pledged to help them through the coronavirus crisis, putting recovery at risk.
Despite a $7 billion program to help small and medium-sized businesses pay their workers as lockdowns tipped Brazil into its steepest annual downturn since records began, banks have so far only 5% distributed of the funds, Economy Ministry data shows.
Jose Eutimio Brandao Jr, who fired 50 of the 170 people he employed at a bar, restaurant, bakery and nightclub in the northeastern state of Alagoas, is one of those affected.
Brandao wanted a loan to help pay his remaining staff, but says his bank turned him down because his group's total revenue surpasses a 10 million reais ($1.9 million) ceiling.
"(The) interest rate is low, equal to the then benchmark Selic, at 3.75% a year, the banks won't make money with it," Brandao told Reuters.
A survey by small business industry group Sebrae found that some 86% of firms that sought loans had not received them, with 28% still awaiting an answer.
Meanwhile BNDES, Brazil's state development bank, is in talks to bail out airlines like Azul and Gol Linhas Aereas Inteligentes, jetmaker Embraer and even the local units of multinationals like Volkswagen (DE:VOWG_p) and General Motors (NYSE:GM).
And while some big corporate rescues have suffered problems, the small business program's limitations have reinforced a perception of inequality in Latin America's largest economy.
Brazilian banks extended 442 billion reais in new loans over the last two months, but almost 60% went to large corporations, Central Bank data on Brazil's total loan book shows.
The Economy Ministry said in a statement to Reuters that it is working on alternative credit lines, and that it is already subsidizing the payroll loan program.
OVERESTIMATED
Many business owners, unsure about their future revenues and concerned they will be taking on debt that will be tough to repay, say they are reluctant to apply for the aid.
Unlike the U.S. Paycheck Protection Program, which forgives the loan if used to pay employees, the funds offered in Brazil are liabilities that would add to a company's debt.
So firms are firing staff or cutting salaries instead.
Luiz Soares, whose three hair salons and one restaurant saw sales decimated by Sao Paulo's stay at home orders, opted to pass on the payroll loan program and fired at least 10 of his 25 formally hired employees.
Soares, 68, who has another 100 people working for him as contractors, is now renegotiating existing bank loans, although he worries whether customers will show up at his mall-based restaurant and how many will be allowed in his salons.
"I can't get more credit, I have no idea of when I will be able to reopen and how much my revenue will be," Soares said.
Only 40% of the small businesses polled by Sebrae sought loans, although 90% say they lost revenue during the pandemic.
Even among those who did try to borrow, many said they struggled with the complexities of the program, which include having a bank manage payrolls and risk analysis by the banks, which include Itau Unibanco, Banco Bradesco and Banco Santander (MC:SAN) Brasil, administering the scheme.
These banks must also provide 15% of each loan, which critics say has made them overly strict in considering applications because their own capital is at risk.
"The reach of payroll credit has been overestimated, as most targeted companies do not comply with requirements," Cassio Schmidt, Santander Brasil's director of retail loans, said.
Schmidt told Reuters the bank has been less strict for the payroll loan, but is still flagging obvious risks, such as borrowers more than 30 days in arrears on existing loans.
Itau and Bradesco did not comment.
LONG STRUGGLE
But many businesses say banks are avoiding a program they view as risky and offering too little profit.
"Banks do not want to run the risk, they know restaurants will struggle for a long time," said Paulo Solmucci, head of Brazil's restaurants association, which represents 6,000 businesses, saying most of them did not get loans.
Some business owners told Reuters that since the loans are focused on payrolls only, they fall short of many of their needs, including rent and utility bills.
The program also requires companies to process their payrolls through one of Brazil's largest banks, giving small businesses, many of which electronically transfer funds to employees or pay cash, an added hurdle.
To broaden the program's reach, the government is considering changes such as allowing companies to fire up to 50% of their workforce and raising the revenue limit to 50 million reais, central bank chief Roberto Campos Neto said this week.
And in answer to complaints from some businesses that the payroll loans did not address other costs, it will start offering an all-purpose credit line.
But borrowers under that program, which is not yet operational, must start repaying the loans within a month, a tough ask for companies that have no idea of when they can resume activities, at least three businessmen told Reuters.
And while the government has promised to make up for 85% of potential losses under that program, banks are responsible for the full amount of the initial loan, making them even more cautious, one executive told Reuters, on condition of anonymity.
Bolsonaro's economic team rolled out yet another program in late May for which small businesses will also be eligible, using funds from an existing state development bank fund.
But Carlos Chiaroni, who owns a music store in a Sao Paulo mall, wants the state to do more.
"If I had all the collateral banks are requesting, I would not need a loan right now. It shows that if the government doesn't provide credit, nobody will," he said.