Interest charged to households is close to the highest level since 2017

Interest charged from households is at one of the highest levels in nearly six years, according to Central Bank numbers. In June, the average rate charged to individuals was 59.09% per year, slightly below the peak reached in May – when it reached 59.88% per year, the highest rate since August 2017. This means that, in a year, a debt of R$ 1,000 grows to almost R$ 1,600.

Rates can reach extreme levels. In the revolving credit card, charged from those who do not pay the entire monthly bill, the rate in June was 437.25% per annum.

The situation is better for companies. From January to June, the average interest rate for legal entities retreated from 25.25% to 23.07% per annum.

Two factors contribute to high interest rates, explains Danilo Igliori, chief economist at Nomad and professor at the Faculty of Economics and Administration at the University of São Paulo (FEA-USP): the high basic rate (Selic) and the high level of the banking spread (difference between the cost the bank has to withdraw the money and how much it charges the customer).

“There is a very large mismatch between the Selic rate and the interest charged from companies and families”, says Carla Beni, MBA professor at Fundação Getulio Vargas (FGV).

Brazil has the highest base rate and the third highest spread in the world

Even with the cut of half a percentage point in the Selic rate, Brazil remains the country with the real interest rate (after discounting projected inflation for the next 12 months). According to the MoneYou portal, it is 6.68% per year, 0.04 percentage points above second place, Mexico.

Data from the World Bank indicate that in 2022, Brazil had the third largest banking spread in the world and the largest among the G20 economies. It was 27.4 percentage points, behind only Zimbabwe and Madagascar. According to the Central Bank, in June 2023 this number was slightly lower: 22.07 percentage points.

The Banking Economy Report of the Central Bank (REB), released in June and referring to 2022, shows that the composition of the spread is formed by:

• default (30%);
• bank administrative expenses (26%);
• direct and indirect taxes and the Credit Guarantee Fund (22%);
• and margins of financial institutions (22%).

“The bank spread can be seen as an additional interest”, says Igliori. He points out that the determinants are credit risk, uncertainties in the economy, market structures and operational issues of financial institutions.

Credit risk is leveraged by debt and default

Credit risk in Brazil is leveraged by high household indebtedness (equivalent to 48.65% of annual income, according to BC data for May) and high default rates (in June, 71.45 million individuals and 6.5 million million companies had the “dirty name”, according to Serasa).

According to the specialist at Instituto Millenium and professor at Ibmec BH, Claudio Shikida, high default rates increase bank costs, given the difficulty in recovering losses.

“In this way, defaulters make banks raise interest rates, since, with non-payment, there are fewer loanable resources. In the face of high demand, the only way out is to raise interest rates,” he says.

Uncertainties in relation to the economy and the Justice favor an increase in the spread

According to the Nomad economist, uncertainties regarding the Brazilian economy also contribute to the difference between the cost of funding and that paid by the borrower. “We have a very large macroeconomic vulnerability and our history does not help”, he explains.

Another aggravating factor is the legal issue. Shikida says that there are also those who perceive the Brazilian justice system as a fragile one, which changes the rules of the game unpredictably and, therefore, bet that their defaults will be partially or totally forgiven by a pen stroke from a judge or a politician.

Banking concentration: a problem that has been diminishing

Market structures are another problem that favors bank spreads, but the scenario has been improving since 2017. “There has been a gradual and continuous reduction in the degree of bank concentration over the last few years, both in terms of total deposits, whether in terms of credit operations”, says Porto Asset’s Chief Economist, José Pena.

The four largest financial institutions in the country – BB, Bradesco, Caixa and Itaú Unibanco – concentrated 59% of the credit market in 2022, according to the REB. Five years earlier, they dominated 78.51%.

Among the reasons are the growth of credit unions, fintechs and payment institutions and the digitization of financial services. “Competition leads to a drop in prices practiced in a market”, emphasizes Shikida.

According to him, fintechs have been fulfilling a social function in addition to providing resources to those who need credit: by increasing competition, they stimulate the search for greater efficiency in the sector.

Structure of banks affects the cost of money

The banking spread is also favored by the operational structure of financial institutions, which is large enough to cover risks and pay costs. This is a problem that, according to experts interviewed by the People’s Gazettehas been losing strength with the advance of competition and the emergence of new technologies.

“It is heavy, but it has been changing with the expansion of fintechs and digital banks and new technologies, such as cloud storage. This has been reducing the need for large storage and data processing structures”, says the FEA-USP professor.