Brazilian household debt has swelled to a record. The government has a way to help: Payday lending.
Brazilian President Dilma Rousseff signed a decree this month making it easier to use payday loans from banks to refinance credit cards. In the U.S., the credit lines have earned a bad rap for high fees and shady marketing, but in Brazil they let borrowers cut interest rates by two-thirds.
That doesn’t mean the rates are low -- at least not by global standards.
While Brazilian household debt as a portion of income is still half that of the U.S., it’s the interest rates that’s worrying bank analysts and consumer watchdogs. In the U.S., credit cards charge an average of about 15 percent a year. In Brazil -- where formal credit is still a relatively new concept for much of the population -- consumers pay 85 percent for cards and 27 percent for payday loans, the central bank says.
“It’s too much credit for people who aren’t educated financially and have to pay such high interest rates,” said Diogenes Donizete, a coordinator of debt services at Sao Paulo state’s consumer-protection agency, known as Procon. Payday loans are just another “excellent ingredient to get even more over-indebted people.”
Rousseff, in a presidential decree on July 13, ordered payday lenders to let borrowers tap credit lines equal to as much as 35 percent of their monthly incomes, up from 30 percent previously. That follows a September decree lengthening the maximum maturity on the loans to 72 months from 60 months.
Heavy Debt Burden
Ratcheting up what for many is a credit line of last resort underscores just how heavy the debt burden has become for many Brazilians. As unemployment rises and interest rates climb, rising household debt threatens to exacerbate the downturn in an economy that’s already on course for its worst recession in a quarter century.
“Workers’ wages are declining and inflation is rising, while fewer people are employed,” said Rodrigo Melo, chief economist at Icatu Vanguarda Administracao de Recursos. “Outstanding consumer lending will continue growing simply because interest rates are climbing.”
Brazil’s central bank on Wednesday raised the benchmark lending rate by 50 basis points to 14.25 percent.
For Brazilian banks, payroll lending -- or “consignado” in Portuguese -- are generally considered among the least risky lines of credit because they are paid back through direct deposit from borrowers’ salaries, said Gilberto Tonello, an analyst at Grupo Bursatil Mexicano.
Banco Bradesco SA, Latin America’s second-biggest lender by market value, said Thursday provisions for bad loans climbed 13 percent in the second quarter from a year earlier, and debt 90 days or more overdue rose 0.2 percentage points to 3.7 percent. It’s the first Brazilian bank to report results.
Bradesco fell 1.3 percent to 27.23 reais at close in Sao Paulo trading.
Brazilian household debt as a percentage of disposable income swelled to 46.3 percent in April, the highest since at least 2005 when the central bank started tracking the data. U.S. borrowers’ debt burden fell to 102.1 percent, a 13-year low, data compiled by Bloomberg show.
Quality of Loans
Besides the high interest rates, there’s another key difference that makes Brazil’s debt load more worrisome: the quality of the loans. While 70 percent of the U.S.’s household borrowings are in the form of mortgages, in Brazil it’s 32 percent. And filing for bankruptcy protection to get out from a crushing debt load isn’t an option -- it doesn’t exist for individuals in Brazil.
While the increase in payday lending may help reduce debt in the short-term, it’s likely some consumers will use it to refinance higher-interest liabilities and then run up their credit-card bills again, according to Moody’s Investor Service.
Consumers tapping the credit line “will have less available income amid high inflation and a deteriorating labor market,” Moody’s analysts including Ceres Lisboa wrote in a note to clients on July 16. That means “borrowers may need to incur new unsecured debt.”