Interest Rates, Credit Ratings, and Collateral as Determinants of Default: An Econometric Analysis of Micro and Small Enterprises in Brazil

Abstract

This paper examines the determinants of credit default among Brazilian micro and small enterprises (MSEs), focusing on the effects of interest rates, credit ratings, and collateral requirements. Using a sample of approximately 1,500 working capital credit contracts from a Brazilian financial institution in 2019, we apply Ordinary Least Squares (OLS) and Binary Probit models to analyze repayment performance. The results indicate that higher interest rates significantly increase both payment delays and default probability, highlighting the sensitivity of MSEs to financing costs. Credit ratings are also relevant, particularly for low-risk borrowers, while collateral requirements show no significant effect on default reduction, suggesting moral hazard issues and supporting the “lazy banking” hypothesis. These findings suggest that interest rate management and borrower screening are more effective risk mitigation tools than collateral-based guarantees in MSE financing within emerging economies.