Brazilian banks are preparing for a continued increase in consumer and business defaults in the coming months, says Erica Fraga in a Folha article. This blog has previously discussed how banks have already increased reserves against defaults in 2011 as consumers struggled to manage record debt levels.

Central Bank data show that the provisions for doubtful loans made ​​by the financial system in general grew at a faster pace than the expansion of credit stock in December. The trend was repeated in January…. see graph below (blue line is for credit operations and orange line for bank provisions against bad debt… in percentage).

It is the first time this happens since 2009, when banks began to raise their provisions as a result of the damage caused by the global crisis.

Provisions for bad debt in 23 large and medium sized banks grew 42.2% in 2011. The percentage is more than twice the 19.8% credit expansion recorded for these institutions, according to data compiled by Austin Rating. The banks have increased provision reserves above of that required by law.

Below, the graph shows the increase in default rates (in red) and interest for loans given to individuals (in orange). Note how the market interest (between Dec and Jan) goes up even at a time when the central bank reduces their (SELIC) interest rates. It just shows that banks are very cautious….

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