Beware Brazil's Shadow Lending: The Ticker
Brazil has been a relatively bright spot in a broadly sluggish global economy. But it's hard to know how much its rapid growth has been fueled by credit, a problem that could mean trouble down the road.
To keep the country's economy growing, Brazil's central bank has been easing controls on lending -- a policy that is likely to add to an already rapidly growing consumer debt burden. Total outstanding credit was up 19.6 percent in September from a year earlier, driven by a 47 percent rise in mortgage loans, according to Bloomberg News.
The official figures, though, provide only part of the picture. Brazil has a huge informal economy that runs in part on a kind of informal credit called "vende-se fiado," or store tabs. Here's how it works: A person goes to a bakery and buys bread, and the seller writes down the name of the person alongside the item purchased and the amount. At the end of a stipulated period, the seller hopes (only in good faith) that the buyer will pay him back.
Small businesses in Brazil use such loans to attract and retain customers, and to gain space in the marketplace. In smaller cities, retail establishments that demand payment up front find it hard to stay in business. Because informal loans are documented only in the form of store tabs, the government has no good measure of how much credit has been extended, and store owners have little recourse if loans aren't repaid.
Such small lenders stand to bear the brunt of the pain if Brazil's consumers run into financial trouble. Many Brazilians haven't been trained in the use of formal credit or in how to control debt. With inflation running at close to 7 percent and credit-card companies charging interest rates of 12 percent per month or more, some are already feeling the pinch. The default rate on consumer loans stood at 6.8 percent in September, up from 5.7 percent at the start of the year.
Faced with a choice between paying a vendor's tab and staying current on high-interest financing (for a house or a car), Brazilian consumers are likely to prioritize the latter. That's not an encouraging picture for myriad small businesses, or for the millions of people they employ.
(Mayara Vilas Boas is on the staff of Bloomberg View)
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