UPDATE 4-Brazil takes emergency steps to boost bank lending hit by coronavirus

(Adds bank exec comments)

BRASILIA, March 16 (Reuters) - Brazil on Monday approved a raft of measures aimed at maintaining the flow of credit in the economy and expanding banks’ lending capacity, but lenders were skeptical on how effective they would be.

The National Monetary Council (CMN), Brazil’s highest economic policy body that includes the economy minister and central bank president, approved the measures after an emergency meeting.

The new steps will allow banks to offer firms and households in good financial shape increased loans and better terms over the next six months. That could apply to up to 3.2 trillion reais ($640 billion) of loans, the central bank said.

The new rules allow banks to extend loan maturities for the next six months without requiring them to increase loan-loss provisions.

Brazil’s five biggest lenders - Banco do Brasil SA , Caixa Economica Federal, Itau Unibanco Holding SA, Banco Bradesco SA, and Banco Santander Brasil SA - will comply with requests from individuals and small companies to extend loan payments for 60 days, according to bank lobby association Febraban.

In addition, a 56 billion reais relaxation in banks’ capital requirements could free up a potential 637 billion reais for fresh lending across the economy, the central bank said.

“These are proactive measures, countercyclical steps which will help companies and households face the effects of COVID-19,” the central bank said in a statement. “These are measures in line with action taken by the federal government and other international financial regulators.”

The impact of the measures for the banking system remain unclear.

“All actions are positive, as they will increase liquidity for individuals and companies, but it is difficult to know if banks will extend loans after this,” said Ricardo Gelbaum, head of the Brazilian Association of Banks (ABBC), which represents roughly 80 small and mid-sized lenders.

Two bank executives at two of Brazil’s biggest lenders called the plan weak, citing concerns that the changes are mainly aimed at capital, not liquidity. As a consequence, the measures are unlikely to lead banks to increase or even maintain current disbursement levels, they said, requesting to remain anonymous as there are ongoing discussions with authorities.

“Right now, money has to circulate in the economy and these measures do not promote it,” one of the sources said. “I am not going to grant new loans because of today’s measures.”

The central bank said it will continue to monitor financial market and economic developments. Last week, Brazil’s monetary authority lowered banks’ reserve requirements, in an attempt to increase liquidity.

Brazil has 234 confirmed cases of the virus so far, according to the health ministry, with no deaths.

$1 = 4.97 reais Reporting by Jamie McGeever, Marcela Ayres and Carolina Mandl Editing by David Gregorio and Rosalba O’Brien