When Banco PanAmericano, a middle-market Brazilian bank, came close to collapse last month, it looked like a sure sign of more widespread trouble.
Like many small and medium-sized banks, Pan-Americano had flourished by lending to some of the tens of millions of people who have emerged from poverty to join Brazil’s rising consumer classes over the past decade. However, the bank ran into difficulties when default rates hit as much as 20 per cent.
The central bank insists PanAmericano was an isolated case but, if other banks use the same business model, surely some of them must be in similar difficulties?
However, Brazil is going through a credit boom and the pace of this growth has left many wondering when more trouble will emerge.
The amount of credit in the economy has risen from 22 per cent of gross domestic product in 2002 to about 47 per cent today. That is still much less than the 100 per cent or more found in developed economies and analysts expect the current surge to continue to at least 60 per cent of GDP. “Growth has come from the C, D and E classes [the middle to bottom of the economic pyramid],” says Andrew Frank Storfer, president of Anefac, an association of financial market executives. “These families have no financial education and are taking credit indiscriminately.”
Particularly worrisome is the expansion of credit card lending. The number of credit cards in Brazil grew from about 28m in 2000 to about 153m this year while credit card sales rose from R$46bn ($26.7bn) to an estimated R$309bn.
This reminds some of South Korea’s credit card crisis of 2003, after card issuance swelled from 39m in 1998 to 105m in 2002. Ultimately, the government had to bail out institutions making massive write-offs. LG card, which needed $4bn, was estimated to represent about 40 per cent of the total exposure.
“What is worrying is that we have millions of voracious consumers arriving on the market without the slightest access to information or advice on how to use credit cards,” says Sergio Belsito, president of the union representing staff at Brazil’s central bank.
A separate surge in lending has come from new collateralised debt either linked to payrolls – where repayments are deducted from borrowers’ pay or pensions – or used to finance purchases of motor vehicles, often in as many as 80 or more monthly instalments.
The central bank’s policy interest rate is 10.75 per cent a year and inflation about 5 per cent, resulting in the highest real base rate among the world’s big economies. But lending rates are much higher. According to Anefac, credit provided by retailers cost an average of 91.2 per cent a year in October; bank overdrafts averaged 136.6 per cent and credit card debt, 238.3 per cent.
Collateralised debt is cheaper: payroll loans cost about 32 per cent a year and vehicle loans a little more.
But even such “cheap” loans are risky and Pan-Americano’s problems worsened with the global financial crisis from September 2008, when bank funding dried up. To ease the situation across the sector, the central bank allowed big banks to buy credit portfolios from smaller ones. PanAmericano, the central bank says, kept some portfolios on its balance sheet after they had been sold, and sold some portfolios more than once. The alleged fraud came to light last month in a central bank inspection of portfolio sales which, it says, found no such problems at other banks.
The central bank declined to be interviewed, but a person familiar with the situation said such one-off inspections would now become routine and that measures were being prepared to keep closer track of consumer lending – at present, the central bank is informed only of loans of more than R$5,000.
The person said the bank had considered putting limits on long-maturing vehicle loans before the crisis but it was decided that, with less than 5 per cent of loans being repaid over 60 months or more, it was not worth risking the potential damage to consumer confidence.
Overall, rates of non-performance – repayments more than 90 days overdue – are currently about 7 per cent. Although high by international standards, this is low for Brazil.
Brazilian borrowers only acquire a credit history when they default. Because there is no “positive” registry of borrowers, all those who ask for loans are treated as defaulters. Legislation that would create such a registry is stalled in Congress. “There is no distinction between good and bad payers,” says Francisco Valim of Experian, a credit risk consultancy. “Brazilian law protects the defaulter, not the payer.” Nevertheless, he says credit crises “are problems of governance, not of credit”.
If PanAmericano had been better informed, it might not have needed a R$2.5bn rescue. As the sacking of its directors suggests, better governance might also have helped.
Fonte: Financial Times