On March 29, the Central Bank of Brazil published Public Notice No. 64/2018, containing a proposed resolution to regulate the conditions and limits on credit transactions with related parties by financial institutions and leasing companies.

For a long time, a generic rule prohibited financial institutions from granting credit to related parties. More recently, however, in the process that culminated in the enactment of Law No. 13,506/17, an amendment to article 34 of Law No. 4,595/64 created several new exceptions to this rule, although the principle prohibiting the granting of credit to related parties still prevails. The proposal for a resolution commented on in this article regulates the provisions of article 34 of Law No. 4,595/64, as amended by Law No. 13,506/17.

With regard to the definition of related parties, the proposal for a resolution does not innovate, but merely repeats the text of the law. However, there are several aspects of interest regarding: (i) the definition of credit transactions; (ii) the definition of conditions compatible with the market; and (iii) the limits for transactions with related parties. Each of these items is analyzed separately below.

Definition of credit transactions. Historically, the concept of credit transactions was restricted to lending, financing, and security discount transactions, so much so that there was a need for a later rule "clarifying" that the same restrictions for credit transactions with related parties would also be applicable in the case of guarantee transactions. Now, in the proposal submitted for public consultation, the role of credit transactions appears not only broader (including, for example, transactions with post-paid payment instruments) but also covering "other transactions or contracts with credit-like characteristics." That is, instead of adopting a strictly formal conceptualization, the regulator also considered the function and the essence of the instrument. This seems to us to be very positive, since it is an exception to a prohibitive rule.

Conditions compatible with the market. The Central Bank of Brazil determines that credit transactions with related parties must comply with the same standard adopted for transactions with unrelated parties, that is, they must be contracted under conditions (interest, term, guarantees, etc.) substantially similar to those prevailing for similar transactions with unrelated parties, including when collateral is required (e.g. if the institution requires collateral from a customer with a given risk rating and if the related party that qualifies with such risk requires collateral).

Limits. In addition to normal market conditions, such transactions may not exceed certain limits. Thus, there is an overall limit (10% of the institution's adjusted equity) applicable to the total balance of such transactions and there are individual limits (i.e. a maximum risk exposure to a single borrower) of 1% of PLA for individuals and 5% for legal entities, both of which are calculated on the date the loan is granted.

The Central Bank of Brazil will receive comments and suggestions until April 13.