As a result of higher disposable income levels, lower unemployment and a healthy banking system, the flow of credit cards into the Brazilian marketplace has been increasing rapidly, witnessing a 122 percent growth rate between 2004 and 2009 – a statistic that is expected to expand by 20 percent by the close of 2010 (representing 48 percent of gross domestic product).
According to recent statistics by the Central Bank of Brazil, over half of the country’s issued stock of credit cards was being used as at the close of 2009 – representing a total of 2.8 billion transactions.
Indeed, the nations’ thirst for credit is showing no signs of abating, with the major banking organizations all scaling up their future operations to meet the demand for increasingly sophisticated financial products.
Traditionally known as a country that relied little on borrowed money, consumers have not been put off by the high costs of credit, which have been driven by a comparatively higher national interest rate (SELIC) in addition to factors such as heavy tax burdens and lending organizations taking a cautious view on the inexperience of the market in Brazil.
After some time, the major credit card companies have now come to view Brazil as a very important market, and increasing competition looks set to be the course for the future. Banco do Brasil, for example, recently expanded its credit card business in a joint venture with private rival Bradesco.
More institutions are set to follow suit, attracted to solid lending margins (with average returns on equity currently standing at 20 percent). Reports have recently come to light that one of Brazil’s largest bank’s – Caixa Econômica Federal – also wants to offer a credit card to compete with the Visa and MasterCard brands, with a larger focus on the lower income groups.
Whilst observers have been quick to comment on the risks of overzealous lending practices, particularly so soon after the global credit crisis, the banks have retorted by illustrating the various control and mitigation mechanisms that are instilled into their lending practices.
Banking leaders are keen to stress that the effects on the credit crunch have by no means been underestimated by the Brazilian lending organizations and, even prior to the downturn, most have stated their intention to maintain long term, sustainable and healthy loan books.
Regardless of how this may be interpreted, a number of legal obligations are also placed on the banking system including a recent raise in the amount of money that lenders must keep in reserve at the central bank to almost the same level as before the credit crunch.
The minimum Basel Ratio of the Brazilian banking system is set at 11 percent, which is 3 percent higher than what is suggested in the Basel Accord. Most banks, in reality, operate much higher than this level (at over 17.5 percent) with low leverage ratios (over six times the level of their capital holdings).
Brazil has also recently signed the revised future Basel stipulations resulting from reforms of financial markets across the world in a post economic crisis environment.
Furthermore, measures such as the Cadastro Positivo (a system where borrowers who do not pay on time are listed in an entirely public and transparent manner) will help reduce default rates and encourage Brazil’s banks to take controlled risks when increasing their loan books. This, in turn, will also encourage increased competition between the banks which should facilitate better borrowing costs for consumers.
Added to this are the practical benefits being implemented which will facilitate the ease of processing credit card transactions in Brazil’s growing retail industry (examples of which include more streamlined point of sale terminals).
Measures are also in place for the introduction of a new form of debit card aimed at not only encouraging more people to use banking services but also as a means to reduce the inconvenience of cash payments.
Read this author’s interview with Brazil’s leading credit agency – Serasa – looking into a range of issues including the country’s ever-growing financial sector; differences compared to other parts of the world; Brazil’s current economic behavior and its relationship with the credit industry; the growth of the credit market; availability of credit in the short, medium and long term; how Brazilian banks analyze loan applications amongst several other topics of discussion:
Ruban Selvanayagam is a Brazil Real Estate & Land Specialist.