The Brazilian banking industry has undergone important structural changes, from the highly inflationary environment of the 1980‘s and early 1990‘s to an environment of greater monetary and macroeconomic stability since 1994, after the launching of the Real Plan. Prior to 1994, banks benefited from high inflation-related gains (which, according to Central Bank estimates, reached a peak of 35.0% of total industry revenues) and the industry was characterized by a heavy presence of state-owned banks as well as by regulatory restrictions on the participation of foreign financial institutions, resulting in low competitiveness and inefficient cost structures.
The monetary stability achieved in 1994 brought about a steady increase in demand for credit in Brazil. That increase, together with the loss of inflation-related gains, pressured the banking industry to improve its operating efficiency, opening the way to a period of rationalization and consolidation. The Brazilian government actively monitored that process and developed programs designed to protect the public interest that included measures to ensure the solvency of the system, reduce the role of the state-owned institutions, and increase competition among private banks. The Brazilian government also relaxed the restrictions to the entry of foreign banks into the Brazilian market; consequently, participation by those banks increased significantly.
Although Brazil still has a low bank penetration rate (credit/GDP) when compared with other more developed countries, that rate has risen consistently in recent years. According to the Central Bank, approximately 40 million Brazilians have no access to any banking service. Brazil still ranks behind other, comparable, emerging markets in terms of consumer credit, and also behind other more developed countries, which indicates that there is potentially space for further expansion of banking operations.
The following graphic presents the evolution of credit in circulation of balances on loans in the national financial system that were made using free funds (funds not subject to specific earmarking requirements) during the periods indicated:
According to Central Bank figures, the total consumer credit balance increased, on average, by a compound annual rate of 22.5% between December 31, 2000 and December 31, 2009, reaching R$319.4 billion on December 31, 2009, or 44.5% of all credit in circulation in Brazil.
The following graphic presents the trend in consumer credit in circulation, by product:
Overdraft protection, or the guaranteed personal cheque, is usually offered by institutions that accept demand deposits. In general, these are the major retail banks, including large foreign conglomerates. Interest rates are relatively high and, because of that, BMG believes that consumers use this line of credit as a last resort.
Personal loans (loans made without a specific purpose) are characterized by relatively high interest rates intended to off-set relatively high rates of default. This type of loan is frequently used by consumers who have limited credit availability. There is no collateral, nor are the proceeds tied to specific purposes. Major retail banks offer personal loans to their customer base through their network of branches, while the small and medium-size banks, focused on a certain niche, operate through small offices in Brazil‘s major cities.
The vehicle financing market is dominated, basically, by large retail banks, which have gradually taken over the positions formerly occupied by institutions affiliated with automakers. Interest rates on this market are extremely competitive, and access to attractive financing is an important advantage. The smaller institutions that serve this market are, in most cases, focusing on the used vehicle segment. Default rates are relatively low and the loans are backed by the financed vehicle, which can be repossessed and auctioned off if the borrower defaults.
Credit card lending is dominated by large retail banks that operate under their own banners in association with international banners like MasterCard and Visa. The default rates for this type of credit are relatively high as are interest rates charged to consumers.
Installment credit offered by retail store chains involves the financing of consumer goods, including durable goods such as building materials and home appliances, as well as non-durables such as apparel and groceries. The installment credit market is the most fragmented of all segments of consumer credit in Brazil. Major retail chains have traditionally financed their customers‘ purchases, but recently some agreements have been entered into between the chains and banks that are interested in taking over those credit operations.
The paycheck loan deductible market developed as a response to the Brazilian consumer‘s need for alternative sources of credit. Historically, the cost of access to the more traditional lines of credit has been very high, for various reasons, including the level of competition in the banking sector, the legal and institutional structure, and the credit risks. According to Central Bank data, on December 31, 2009, retail banks were charging, on average, annual interest rates of 159.08% on overdraft protection credit and 44.35% on personal lines of credit (including paycheck deductible loans). In addition, on that date the average interest rates on vehicle financing loans and retail store credit were 25.37% and 54.83%, per annum, respectively. On December 31, 2009, the average annual interest rate on paycheck deductible loans was 27.9%. Paycheck deductible loans have replaced direct personal loans as the most attractive unsecured consumer credit alternative.
The following table details the outstanding balance on paycheck deductible loans to employees in the public and private sector, and for INSS retirees and pension beneficiaries, during the indicated periods.
|Outstanding Balance (R$ billion)||%|
|Public Sector and INSS||Private Sector||Total Paycheck
|Consumer Credit||Personal Credit|
Includes credits granted by credit unions
Source: Central Bank of Brazil
The percentage of paycheck deductible loans in the total loans to individuals increased from 45.7% on December 31, 2005, to 56.8% on June 31, 2009
Paycheck deductible loans are the fastest-growing kind of consumer credit in Brazil. Their share of total consumer credit rose from 21.0% on December 31, 2005 to 29.9% on June 30, 2009, according to Central Bank figures. Paycheck deductible loans can be made available to the significant percentage of Brazilians who do not have bank accounts or access to traditional bank distribution channels, which represents a substantial contingent.