Influenced by the credit boom in 2010 and the slowdown in economic activity last year, the delinquency rate among Brazilian consumers has soared. In some cases, like auto loans, defaults exceed 2009 levels. The still weak Brazilian economy should see some improvement in default rates only in the second half of this year, aided by lower interest rates and bank spreads.

“The default rate is not yet at its peak, it is a lagging indicator. And the economy had a “shy” first quarter at an expansion of about 0.5%. This weak growth should maintain this delinquency trend, probably until the second half,” said former Central Bank director Carlos Thadeu de Freitas.

The Brazilian Central Bank (CB), which announced today the data for the month of March, estimates that payment delays of 90 days (or more) on personal credit account for 5.61% in February, slightly below the 5.82% recorded in February 2009. Overall, individual default rates in February were 7.59%, compared to 8.54% in May 2009 – the highest levels in the post-crisis period. But the situation appears more critical in auto loan financing: the delays amounted to 5.5% in February, almost double last year’s 2.8% (February 2011) and surpassing 2009’s highs of 4.4%.

“There was a lot of credit in the marketplace, and consumers went into debt. In addition, inflation consumed part of their income. With the amounting financial stress, the car seems to no longer be essential, it is no longer a priority for the consumer. The only alternative in this scenario is a negotiation between banks and customers,” attests Sergio Bessa, an economist at the Getulio Vargas Foundation (FGV).

Bad check returns up 11% in March

The default rate has limited the earnings of banks. Itau Unibanco and Bradesco increased its provisions against bad debt by R$26 billion in the first quarter.

“I see the defaults stabilizing sometime in the second quarter because of the economic stimulus and lower interest rates,” says Prosper Corretora’s chief economist Eduardo Velho.

Jose Antonio Praxedes, president of Telecheque, doesn’t agree, pointing out that default rates should rise in coming months. In March, there was an increase of 10.94% in returned checks compared to the same month last year, the highest since 2010.

“We’re in an uptrend in default rates (see chart below). In June and August it will advance because of Mother’s Day purchases. And these levels should remain high due to social inclusion programs.”

For Tendencias’ economist Marcio Nakane, government policies to reduce banks’ interest rates should have no effect whatsoever in the short term due to high default rates:

“The possible effects of government policy, either in increased volume of credit or bank spread reduction, will not be felt by the consumer because default is an important component of the spreads.”

Source: O Globo

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