Credit in Brazil
A more interesting decline
Borrowing costs have started to fall at last, but the hard part lies ahead
Apr 21st 2012
SÃO PAULO
“HISTORIC”; “drastic”; “unbeatable”: no one could accuse Caixa Econômica Federal, Latin America’s fourth-largest bank, of downplaying its latest interest-rate cuts. Anywhere except Brazil, the supposedly cut-price loans it offers would look more like usury. Interest on overdrafts, for example, has fallen from 157% a year to 51%. Customers whose salaries are paid into a Caixa account will soon be offered a credit card charging 2.85% monthly—down from 12.86%. Yet Caixa is not exaggerating about the break with the past that its new rates represent. For Brazilians with recent memories of hyperinflation, an overdraft at 51% a year is an unheard-of bargain.
Now the government is trying to force the pace. On April 18th the Central Bank made its sixth consecutive cut to its policy rate, bringing it to 9%, an all-time low in real terms. Its policymakers see subdued global demand as an opportunity to reset rates at a lower level, without risking a return to higher inflation.
However, government officials believe Brazil’s big banks wield hefty market power, and worry that they will gobble up the benefits instead of passing them on to consumers. As a result, they have resorted to browbeating, dragging bankers into the finance ministry and ordering them to cut rates and lend more. Earlier this month Murilo Portugal, the president of Febraban, the bankers’ trade association, met Guido Mantega, the finance minister. He suggested that lower reserve requirements and taxes, together with greater rights for creditors, would help to cut rates. Mr Mantega later retorted publicly that the conditions were already in place for Brazilian banks to stop being the “world champions of spread”. He suggested the cuts could come out of the banks’ profits instead.
The combination of monetary policy and badgering seems to be working. Both Caixa and Banco do Brasil, another large bank the government controls, have cut the cost of consumer credit in recent weeks.
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On April 16th HSBC lowered the rate on loans for its lowest-risk Brazilian customers, and the following day Santander said it would be giving small businesses cheaper credit. On April 18th Bradesco, Brazil’s third-biggest bank, said it would cut rates too.
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Yet despite such progress, both the Central Bank’s policy rate and the margin between banks’ borrowing costs and what they charge for credit remain well above levels elsewhere (see chart). Spreads on consumer lending, in particular, are whopping by international standards, only recently falling below 30 percentage points. High borrowing costs are widely cited as a reason why Brazil’s trend growth rate of 4% lags behind those of other big emerging economies such as China or India. Unfortunately, now that the low-hanging fruit has been picked, further rate cuts will be much harder to achieve.
One barrier is the government-backed savings accounts that offer tax-free annual interest of 6.17%, guaranteed by law. That puts a floor of around 8.5% underneath the Central Bank’s policy rate, since going lower would probably provoke a mass migration from floating-rate government bonds. It sets the benchmark for other savings accounts too. But the government has shied away from the political fight that would be needed to change the rules.
Subsidised loans to favoured businesses by the country’s development bank, BNDES, are another obstacle. Because they stimulate demand, the Central Bank has to keep the base rate higher than would otherwise be required to control inflation. The BNDES’s loan book has grown substantially in recent years, and its rates are as heavily subsidised as ever. On April 16th its chairman, Luciano Coutinho, said it would be lending lots more this year as part of a government stimulus package.
The biggest culprit of all, though, is Brazil’s low savings rate, which has averaged just 16.5% since the mid-1990s. Merely matching Mexico, itself no champion saver at around 22.6% of GDP, would allow the base rate to fall by more than two percentage points without risking higher inflation, calculates Alex Segura-Ubiergo of the IMF. If the tightening were to come mostly from public savings, the effect would be even more pronounced. But there is no sign of that happening. To the contrary, consensus analysts’ forecasts have inflation rising again later this year. That would force the Central Bank to raise rates in response. The respite for Brazilian borrowers may not last.
Now the government is trying to force the pace. On April 18th the Central Bank made its sixth consecutive cut to its policy rate, bringing it to 9%, an all-time low in real terms. Its policymakers see subdued global demand as an opportunity to reset rates at a lower level, without risking a return to higher inflation.
However, government officials believe Brazil’s big banks wield hefty market power, and worry that they will gobble up the benefits instead of passing them on to consumers. As a result, they have resorted to browbeating, dragging bankers into the finance ministry and ordering them to cut rates and lend more. Earlier this month Murilo Portugal, the president of Febraban, the bankers’ trade association, met Guido Mantega, the finance minister. He suggested that lower reserve requirements and taxes, together with greater rights for creditors, would help to cut rates. Mr Mantega later retorted publicly that the conditions were already in place for Brazilian banks to stop being the “world champions of spread”. He suggested the cuts could come out of the banks’ profits instead.
The combination of monetary policy and badgering seems to be working. Both Caixa and Banco do Brasil, another large bank the government controls, have cut the cost of consumer credit in recent weeks.
.
On April 16th HSBC lowered the rate on loans for its lowest-risk Brazilian customers, and the following day Santander said it would be giving small businesses cheaper credit. On April 18th Bradesco, Brazil’s third-biggest bank, said it would cut rates too.
.
Yet despite such progress, both the Central Bank’s policy rate and the margin between banks’ borrowing costs and what they charge for credit remain well above levels elsewhere (see chart). Spreads on consumer lending, in particular, are whopping by international standards, only recently falling below 30 percentage points. High borrowing costs are widely cited as a reason why Brazil’s trend growth rate of 4% lags behind those of other big emerging economies such as China or India. Unfortunately, now that the low-hanging fruit has been picked, further rate cuts will be much harder to achieve.
One barrier is the government-backed savings accounts that offer tax-free annual interest of 6.17%, guaranteed by law. That puts a floor of around 8.5% underneath the Central Bank’s policy rate, since going lower would probably provoke a mass migration from floating-rate government bonds. It sets the benchmark for other savings accounts too. But the government has shied away from the political fight that would be needed to change the rules.
Subsidised loans to favoured businesses by the country’s development bank, BNDES, are another obstacle. Because they stimulate demand, the Central Bank has to keep the base rate higher than would otherwise be required to control inflation. The BNDES’s loan book has grown substantially in recent years, and its rates are as heavily subsidised as ever. On April 16th its chairman, Luciano Coutinho, said it would be lending lots more this year as part of a government stimulus package.
The biggest culprit of all, though, is Brazil’s low savings rate, which has averaged just 16.5% since the mid-1990s. Merely matching Mexico, itself no champion saver at around 22.6% of GDP, would allow the base rate to fall by more than two percentage points without risking higher inflation, calculates Alex Segura-Ubiergo of the IMF. If the tightening were to come mostly from public savings, the effect would be even more pronounced. But there is no sign of that happening. To the contrary, consensus analysts’ forecasts have inflation rising again later this year. That would force the Central Bank to raise rates in response. The respite for Brazilian borrowers may not last.
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