Brazil Economy Hobbled By High Banking Lending Rates

Brazil’s economy is being hobbled by average banking lending rates that are the highest of all the 55 developed and underdeveloped countries around the globe, reported the Wall Street Journal.

The report, citing Trading Economics, a research firm, reported that bank lending rates in Brazil are 53 percent, which is hurting the ability for a consumer to finance purchases and making access to credit a huge risk for entrepreneurs and small business owners. The topic is expected to be a hot-button issue during the presidential election slated for October as the candidates offer up ways to fix an economy that has been plagued with low growth, reported the Wall Street Journal. The paper noted the central bank cut the basic rate that banks lend to each other to a low of 6.5 percent — down from 14.25 percent — which is a historic low. Prior to July, the annual consumer rates for credit cards reached 270 percent for unpaid balances.

The reason for the high rates partly is the fact that the big banks in Brazil don’t have competition. There are five banks in a country that has a population of 210 million, and two are controlled by the government. Those banks provide the lion’s share of consumer lending for the country — and with no competition, the banks can set high rates and offer low-quality services. They can also hide loan details, noted the paper, citing economists. Pointing to a World Bank report from last year, the Wall Street Journal reported borrowers in Brazil paid on average 38.4 percent points higher than those paid by lenders themselves. In Mexico, the spread is 4.5 percentage points, and 9.7 percentage points in Argentina.  In Brazil, “The banks can do whatever they want,” retired Army officer Rogério Nonato told the WSJ.

Despite the complaints, the Brazilian banks federation, Febraban, told the WSJ there is enough competition in the banking sector and that the problem has more to do with taxes, high default rates, and regulation. “Brazil has high costs on financial activity that financial institutions can’t control,” Febraban said, according to the report.