The new president of Brazil’s central bank has identified the large interest rate spread applied by banks on top of the base rate as an obstacle to economic growth. His plan to increase competition and reduce this ‘spread bancario’ is long overdue.
On an average night, about 46 million Brazilians settle down to watch TV channel Globo’s evening novella. The actors grapple daily with love and sex, marriage and betrayal. As well as being a bit of light relief, the TV novellas have been used as a force for good: portrayals of gay characters and couples have helped increase the tolerance of gay rights in the country. Health messages have been woven into the plots to raise awareness and lower infection rates of certain mosquito-borne viruses.
And in the near future – if Ilan Goldfajn, the new president of the country’s central bank gets his way – one of the lead actors may be seen opening a credit card statement, furrowing her brow before picking up a tablet and opening the browser. The camera zooms in over her shoulder and focuses on her typing the Portuguese for ‘debt consolidation options via low APR loans secured by home equity’.
“If you could get the main actor in a novella to do a financial calculation, that would be great,” says Goldfajn. “We are giving a lot of weight to financial education. Brazil has seen a lot of financial inclusion recently – millions and millions more people now have accounts and credit cards, but they need to understand the instruments, they need to know how much they are paying and how much they cost.
“We are making a lot of effort to make agreements with organizations that have capillarity of distribution, like high schools, the army, the justice system and small and medium-sized enterprise associations. And we are also trying to get into television.”
This focus on financial education and improved understanding about interest rate charges and alternative and more efficient financial products is intended to complement one of the bank’s other main agenda items: lowering the ‘spread bancario’.
Because although the sky-high interest rates in Brazil are primarily a function of the very high base (Selic) rate, which is falling quickly (at the last meeting the central bank’s monetary policy committee cut the base rate by 75 basis points and is expected to do so again at the next few meetings), the hefty credit spreads the banks charge on top lessen the positive impact of a lower Selic.
For example, in December 2016’s official credit data from the central bank, while the Selic rate was 13%, the average interest rate charged on top of Selic to consumers in the free market segment was 59.2%. For corporates, it is 16.9%.
There are many causes of the high interest rates in Brazil. Usually fiscal laxity is given the top billing, along with structurally low saving rates. But Goldfajn, who was previously chief economist at Itaú, one of Brazil’s two dominant and powerful private banks, is finally addressing the micro.
He is proposing reforms that should improve banking competition and therefore lower credit spreads. This should relieve the cost of debt servicing on the indebted segments (both consumers and corporates are still highly leveraged), which will free liquidity for renewed consumption and promote GDP growth.
Brazilian households have on average a total debt-to-annual income ratio of between 10% and 12% (about one month’s salary), but the average debt-servicing-to-income ratio is 30%. In the US, average household debt to annual income is 100%, but debt-servicing costs are just 10% of income. If debt servicing can be reduced through lower interest rates, the positive impact for the economy would be large.
Banks have seen the way the wind is blowing and have begun to talk about the spread bancario, too. In a press conference following Itaú’s recent fourth quarter 2016 results, CEO Roberto Setúbal responded to a question about the central bank’s attempt to reduce the bank’s spread by suggesting that the spread in part represents the high default risks banks face when extending credit in Brazil.
However, system-wide non-performing loans, in the middle of the country’s deepest-ever recession, have just touched 5.7% (in free market credit), which does not equate to an unusually large amount of risk. He also discussed high taxes that are levied on the banking system. However, the fact remains that banks in Brazil have been enjoying 20% returns on equity in good times and bad.
Improving competition Does Goldfajn think having banks that achieve 20% RoEs is an inherently good or bad thing?
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