By Stuart Grudgings and Guillermo Parra-Bernal

RIO DE JANEIRO/SAO PAULO (Reuters) - Brazil's
national development bank has gone from savior to suspected
villain as it finds itself at the center of a heated election
year debate over the role of the state in the economy.

As the global financial crisis threatened to engulf Latin
America's largest economy in late 2008, the Rio de
Janeiro-based BNDES ramped up its lending to corporate Brazil,
providing crucial long-term support to companies as private
lending evaporated.

But with its annual loans now double what they were two
years ago, critics say it is overstretched, stunting the growth
of private lending and making the country's finances more
vulnerable. The bank, which now accounts for a quarter of all
credit in Brazil, lends at subsidized rates that make it
impossible for private banks to compete.

Brazil's Treasury has capitalized the BNDES to the tune of
180 billion reais ($102 billion) in the past 18 months,
borrowing at market rates at around 11 percent while the BNDES
lends it out to clients at a bargain price of about 6 percent.

"Many sectors of society believe that the BNDES doesn't
have a cost, and that it can do everything. That means you
can't really choose priorities and that's a problem," said
Mansueto de Almeida, an economist at the government's Institute
of Applied Economic Studies. "The costs need to be shown."

The debate over the BNDES, which disbursed a record 137
billion reais in loans and guarantees last year, comes during a
presidential election race in which the state's economic weight
is one of the few key differences between the main candidates.

Ruling coalition candidate Dilma Rousseff, who leads
opinion polls ahead of the October vote, defends the BNDES's
role as key pillar of the successful economic legacy of her
mentor, President Luiz Inacio Lula da Silva.

BNDES President Luciano Coutinho is seen as one of the
favorites to be finance minister if Rousseff wins.

The opposition has tried to paint the BNDES's lending as
showing that Lula's government has favored a handful of
politically well-connected firms at the expense of the rest.

Its candidate, former Sao Paulo state governor Jose Serra,
favors a slimmer state and has slammed some of the BNDES's
lending practices as the "privatization of public money."

He has hinted he would restrict BNDES lending for merger
and acquisition deals, such as those that helped Brazil's
biggest meat-packing firms expand abroad in recent years.

BACKING NATIONAL CHAMPIONS?

Such assistance to big companies like partially state-owned
oil firm Petrobras and construction group
Odebrecht raises questions over why taxpayers should help
companies that are already globally competitive. Its rapidly
growing exposure to riskier activities such as the construction
of dams, roads and financing takeovers could leave it
vulnerable to surprises.

"The risk is that the BNDES subsidizes regulatory risk,
that it ends up exposed to a handful of important yet quite
risky projects that could all suffer during a downturn," said a
former BNDES president who declined to be identified.

The BNDES denies picking national champions and says the
high share of big firms in its portfolio reflects the structure
of Brazil's economy.

The bank's defenders point out that firms in international
competitors such as China and South Korea benefit from much
cheaper state-backed loans and that much crucial investment in
recent years would not have happened without the BNDES.

A source at the bank told Reuters last week that there was
concern within the institution that it had become too dominant,
but that there was a lack of alternative financing.

"It's not that the BNDES wants to be 'the bank.' It's not
economical and it's not productive," the source said.

The BNDES is expected to lend a record 144 billion reais
this year, a 5 percent increase over 2009, despite government
pledges that it would scale down its lending.

A central concern over the BNDES's dominance is that
Brazil's hard-won fiscal credibility may be stretched in the
coming years if the private sector doesn't play a greater role
in financing. Some 40 percent of the bank's lending now goes to
infrastructure projects and the country's need for better
airports, roads, stadiums will surge as it prepares to host the
2014 World Cup and 2016 Olympics.

"If the private sector does not develop on time, will the
public sector have to bear a higher cost in dealing with this
infrastructure development?" Standard and Poor's analyst
Sebastian Briozzo told Reuters. "This is an issue."
($1=1.75 reais)
(Additional reporting by Rodrigo Viga Gaier, Editing by Todd
Benson)