Brazil Tugged Down by High Lending Rates
The lack of competition among Brazil’s five big banks, two of which are government controlled, is one of the roots of Brazil’s lagging economic growth. Soon after these few banks gobbled up smaller competitors, 82 percent of all consumer lending in the nation was sourced by them. The shortage of competition allows banks to set high lending rates, not improve services, and shield loan details.
Brazil, with 53 percent average bank-lending rates, comes in first place for having the highest rates out of 55 developed and underdeveloped countries. In a country of 210 billion, the soaring rates stumble the consumption habits by restricting financed shopping and limiting entrepreneurship. Brazilian consumers currently facing high interest rates of 6.5 percent and an unemployment rate of 13 percent are hesitant to take out credit. Private commercial banks also do not have much incentive to supply plenty of credit, as the deficiency of competition allows for the flow of revenue without lending abundantly.
Soon after Brazil’s mid-1990’s financial crisis, when the central bank had to lend approximately $20 billion to the nation’s banks, the goal of the central bank shifted toward financial stability at the expense of economic growth. Because of this hyper-prudent approach, the liquidity coverage ratio in Brazil is 224 percent, compared to 100 percent globally. The reserve requirement ratio is 25 percent, which is relatively high compared to other countries, resulting in less money available for lending.
Following eight consecutive quarters of contraction during the years 2015 and 2016, Latin America’s largest economy is still struggling to get back on its feet, and the banking system is not helping. At the end of the second quarter, Brazil’s GDP had only grown one percent since the second quarter of 2017. To facilitate economic prosperity, Brazil must unlock its credit market for all companies, not just the large corporations.
A 2017 World Bank report shows that the “lending rates paid by Brazilian borrowers were on average 38.4 percentage points higher than those paid by the lenders themselves, compared with a spread of just 4.6 percentage points in Mexico and 9.7 percentage points in neighboring Argentina.”
Rodrigo Zeidan asserts that “for credit to go up and interest rates to go down in a healthy manner, the country should enact market reforms to find an equilibrium between prudence and efficiency. Stability should continue to be the main driver, but [Brazil’s Central Bank] should move from its extreme preoccupation with stability to a larger mix of innovation and efficiency. It should greatly reduce directed credit, lower the required ratio, incentivize competition, allow a flexible regulatory framework for fintechs, and move forward with the positive credit bureau and other similar measures.”