Brazil credit bubble fear as defaults rise
Consumer defaults in Brazil are expected to increase by a third by the end of this year, according to a leading credit rating agency, fuelling concerns over a boom in lending that some economists fear could turn into a credit bubble.
The level of loans overdue by 90 days has risen rapidly in recent months to 6.1 per cent and is expected to reach 8 per cent by the end of December, said Ricardo Loureiro, president of Experian Latin America, the credit rating agency.
A market in Rio: consumer defaults in Brazil are high relative to other Bric nations: “Two points are responsible for this increase: the poor data on which companies are basing their credit decisions and a lack of financial education among new consumers who are just entering the market,” said Mr Loureiro. Rising interest rates were a third factor, he said.
While he did not believe Brazil was heading for a credit bubble, the country quickly needed to implement recent legislation to allow Brazilian lenders to collect and share information on all borrowers. Presently, they have access only to data on defaulters.
He compared the situation to flying an aircraft in fog. “We have to fly by instruments,” Mr Loureiro said. “Because nowadays, if you have a default, it will be shown in your report. If you don’t then there is no information about what level of indebtedness you already have.”
The growing number of defaults in Brazil comes as lenders in emerging markets from India to China and eastern Europe are braced for an increase in consumer bad loans.
In most countries, defaults are coming off a cyclical low, but credit quality is expected to come under pressure again as central banks increase interest rates to fight rising inflation.
State Bank of India, the country’s largest bank, reported its net profit in the March quarter was nearly wiped out by provisions for bad loans, while the International Monetary Fund has warned of the high levels of bad loans at east European banks.
In Brazil, while consumer defaults remain low by its historical averages of more than 10 per cent and are still considered to be within reasonable levels, they are higher than in most other emerging markets.
Brazil’s central bank has increased interest rates five times this year to 12.25 per cent, to cool inflation that is exceeding the upper limit of its 6.5 per cent target.
Brazil’s rapid economic growth has lifted more than 30m people out of poverty in recent years.
These new consumers have begun borrowing to buy homes, cars and household appliances, contributing to a near 100 per cent rise in private credit since 2007, according to the International Monetary Fund.
Brazilian banks expect double-digit increases in credit growth this year in spite of charging an average interest rate of 39 per cent.
“In spite of signs of some cooling [in the economy], the expansion of credit is persisting for individuals and companies,” the central bank said in the minutes of its last monetary policy meeting.
However, after hitting a low last year, Serasa Experian, the Brazilian arm of the credit rating agency, reported that defaults rose 8.2 per cent in May compared with March as consumers overspent on Mother’s day presents.
This was the highest month-on-month increase since March last year and brought the rise in defaults since the beginning of the year to 20.6 per cent.
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