Brazil's senate approves funding mechanism for development banks

Brazil’s senate approved a bill regarding a new funding mechanism for development banks like BNDES.

Loans under the mechanism, dubbed LCD, can be issued by development banks to finance infrastructure, industry and innovation projects, and initiatives aimed at micro, small and medium-sized enterprises.  

President Luiz Inácio Lula da Silva can now sign the bill into law, since it passed the lower house in May. 

Bonds that are part of the mechanism will be exempt from taxes for investors who purchase them, with development banks like federal lender BNDES, Minas Gerais state bank BDMG, Espírito Santo’s BANDES or BRDE, focused on the country’s south, able to raise up to 10 billion reais (US$1.8bn) per year via LCD issues, according to a senate statement. 

The mechanism comes as BNDES is stepping up lending. It approved loans worth 24.7bn reais in Q1, up 91% year-on-year. In the infrastructure sector, approved loans surged to 6.6bn reais from 3.3bn reais in 1Q23.

BNDES has reinforced its financing operations since January 2023, when Lula took office.

"BNDES has been actively involved in project financing and this has helped to advance a series of projects and financial operations associated with such projects as well," Marcelo Girão, head of project finance at Itaú BBA, the investment banking arm of Brazil’s largest bank Itaú Unibanco, told BNamericas.

Other analysts raised concerns that more aggressive lending by BNDES could one day be financed with government resources and drain public coffers. However, BNDES has ruled out that possibility.

"With an issuance limit of 10bn reais per year, the LCD's small tax exemption could be passed on in full to borrowers, enabling a reduction in interest rates for companies. Furthermore, it will allow greater diversification of long-term financing sources for development banks, relieving the public budget of any capitalizations of these banks," BNDES head Aloizio Mercadante said in a statement.

"It is important to highlight that the use of this fundraising instrument will be accompanied by impact assessments, which will be committed to measuring, in a transparent manner, how much the transfer of society's resources, in the form of tax exemptions, would generate in terms of social benefits," he added.