The Selic alone does not make a summer – 07/01/2023 – Ana Paula Vescovi

Brazil is approaching another gradual cycle of reduction of the Selic rate. Many associate this drop with the possibility of obtaining credit in better conditions and a quick reactivation of economic activity. This explains the pressure suffered by the Central Bank in recent months.

There are several problems with this intuition, but in this article I intend to focus on the determinants of the difference (spread) between the Selic rate and the interest rate that reaches the final borrower.

Brazil has made notable efforts to have a broader, more efficient and accessible credit system for as many people as possible. We have one of the most engaged central banks in recent technological advances, one of the first to introduce a large-scale instant payment system, in addition to promoting lighter regulation for new financial institutions, especially digital platforms. All this in line with a safe, solid and reliable banking system.

Other innovations have been adopted since the beginning of the 2000s, such as earmarked assets, chattel mortgages, payroll loans, tax incentives for long-term savings, among others.

However, we still live with one of the highest spreads and, therefore, interest to the final borrower in the world. We have invested in numerous studies in the search for answers and, likewise, in numerous initiatives to reduce them. To talk about bank spreads, it is worth saying that for complex problems, there are no silver bullets.

One of the causes is the difficult recovery of guarantees. According to a report by Oliver Wyman (2018), in Brazil, about 13% of guarantees granted are recovered after four years. The Latin American average is 31% in 2.9 years, and the OECD average is 71% in just 1.7 years. The slowness and unstable interpretations of the Judiciary constitute a bureaucratic and adverse environment. The new framework of guarantees intends to establish a specialized management service in an attempt to achieve greater pragmatism and security in the execution of debts, in case of default. Financial education programs also go in the right direction.

But without a Judiciary that analyzes the fundamentals of the issue, there will be no solution. The example of payroll loans is valuable. Except in very specific cases, the execution of the guarantee (salary) is immediate and with low costs. Default is the lowest observed in free personal credit, currently at 3.8%, compared to 7.7% for non-payroll loans.

The administrative costs of borrowing are high and remain under pressure. If the recent labor reform was a step forward in defining the prevalence of collective agreements, the regulatory costs have been higher and asymmetrical, as they demand an increasing use of technologies to meet increasingly complex accounting, tax and supervisory standards.

The adoption of new technologies is just beginning. There is more and more sophistication in the use of mass data and in the construction of algorithms in order to define the risk for each type of credit. Artificial intelligence is a reality in this area. The introduction of open finance and positive registration and the role of credit bureaus facilitated access to critical information, in the direction of efficiency gains.

Electronic duplicata should gain strength for better pricing of receivables, with the adoption of Real Digital. Brazil, moreover, stands out for the extremely high number of cyber attacks, with more than 103 billion attempts in 2022, second only to Mexico (187 billion).

According to Febraban (Brazilian Federation of Banks), the total bank budget in technology reached R$ 35 billion last year, with an expectation of a 30% increase this year.

In Brazil, taxes are paid both on financial services and on spreads. In addition to direct and indirect taxes, there is a contribution to the FGC (Credit Guarantee Fund), which is unequal. There is high uncertainty and judicialization, through frequent changes in rates.

The accumulated tax credits in the system add up to an impressive figure of R$ 281 billion (2.8% of GDP) in the five largest banks alone. Contrary to what is perceived, it is not the banks that pay this bill, but the borrowers. Tax reform is a huge opportunity to correct distortions and bring Brazil closer to international practices.

Finally, there are losses due to the channeling of credit that hinder greater democratization of credit. The new TLP (Long-Term Rate) for BNDES loans reduced subsidies, catapulted private credit and released bank credit for small and medium-sized companies, with less access to the capital market. Currently, these have practically the same representation within bank credit (9.6% of GDP) compared to publicly traded companies (11% of GDP). As a result, credit increased its share of GDP from 100% to 150% in just over five years, with a long way to go before reaching the standard of advanced economies (300% of GDP).

New leaps will depend on new initiatives in the same direction. While preserving the FGTS for financing housing and sanitation, opening access to the fund by the financial and private capital market would allow, on the one hand, better definition of rates, lower transaction costs and better allocation, and, on the other, remuneration fairer for more than 200 million worker accounts.

Even with numerous efforts undertaken, the historical problems of access and allocation to sources of targeted funds and high bank spreads still persist. And the solutions lie far beyond what the probable reduction in the Selic rate could resolve.

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