Loan losses at Mercado Credito Brazil highlight the difficulties of fine-tuning digital lending businesses
A sharp rise in non-performing loans in Brazil is testing Mercado Libre’s credit scoring methodology.
The company’s Mercado Credito division reported a rapid uptick in bad debt in the third quarter, primarily as a result of two new lending products in Brazil.
The figures highlight the execution difficulties in digital lending businesses. Mercado Libre is one of Latin America’s most established technology companies. In the third quarter it posted impressive growth in loans originated and payments processed – as well as reaching a record number of listings on its marketplace.
Still, bad loans across Mercado Credito’s portfolio increased by $13.3 million over the course of the third quarter, a rise of 86%, at a time when the overall credit portfolio shrank.
Two newly launched products – consumer credit and mPOS merchant credits in Brazil – account for most of that rise, Pedro Arnt, chief financial officer, said on the company’s third quarter earnings call.
“Given that we are at such an early stage in both of these products, the higher levels of loan losses are within our expectations,” Arnt told investors.
“It’s important to highlight that both in consumer credit and mPos credits in Brazil, we are taking the appropriate measures to improve these loan losses going forward. We have adjusted pricing, taken advantage of incremental information we collect on non-performing payers to strengthen our churn and behavioral credit scoring algorithms, and have refocused on performing payers.”
Bad debt ratio
Mercado Libre did not detail its non-performing loan ratio, nor offer market by market details. But iupana calculations suggest the non-performing loan ratio is as high as 16%.
Arnt’s comments indicate the total pool of bad loans is around $28.6 million – given the $13.3 million growth in bad loans in the third quarter equated to an 86% rise. That implies that non-performing loans have risen to 16% of the company’s $176 million credit portfolio.
For reference, Brazilian Central Bank data shows that 4.25% of Brazilian bank loans were between 15 to 90 days over due in September, and 3% were more than 90 days overdue.
Despite the growth in bad loans, Mercado Libre’s fintech divisions are increasing their market share rapidly. Some 2 million Argentines now use the company’s QR code system for payments, for example, a figure that doubled in the quarter. And Mercado Pago processed more payments off-platform that it did on its MeLi platform in Brazil, for the first time.
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