(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Raul Gallegos
NEW YORK, Sept 18 (Reuters Breakingviews) - Brazilian banks need a better handle on consumer credit. The liquidation, announced this week, of midsize lender Banco Cruzeiro do Sul stems from fraud, but it specialized in loans to Brazil’s burgeoning middle class. That group has grown so fast that the credit record is about as short as it was for U.S. subprime mortgages in 2008. The comparison is extreme, but it suggests Brazil’s banks need both good data and a cautious approach to lending.
Cruzeiro’s failure hardly threatens the system. The bank’s $4.7 billion of assets accounted for less than 1 percent of the country's total. But its demise highlights how many banks have charged up growth by lending money to consumers new to borrowing.
More than 40 million Brazilians have joined the middle class in the past 10 years, as measured by the Getulio Vargas Foundation, a local think tank. Lending them money carries some of the risks that were involved in extending mortgage credit to U.S. subprime borrowers. Those home loans took off only toward the end of the 1990s. One factor contributing to the financial crisis a decade or so later was that the short history of borrower behavior turned out to be a poor guide to the future.
In Brazil, many people have no credit history. And if they do, it’s not comprehensive – unlike in the United States, where credit bureaus provide detailed reports on pretty much everyone. Those reports have flaws, but at least they’re consistent. The danger for Brazil is that banks lend to consumers with very little to go on. The numbers don’t look pretty so far. In July, the consumer default rate rose to a new high of 7.9 percent, according to the central bank.
Part of the answer is more data. The government last year passed the so-called “cadastro positivo” law, allowing the collection of consumer debt information. But President Dilma Rousseff still needs to sign off on rules required to make the law effective – and unlike in the United States, consumers will have a choice about whether to participate. Meanwhile, banks and private credit bureaus have information on defaults, but not on a consumer’s overall debt load.
Having detailed credit information didn’t prevent the U.S. subprime mortgage debacle. Lenders need to stay prudent, too. That may mean banks should ignore Rousseff’s entreaties to lend more as economic growth slows – until they know enough about their customers. That way, Brazil’s reputation for having a solid banking system won’t come under threat.
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- Brazil’s central bank ordered the liquidation of local lender Banco Cruzeiro do Sul and its subsidiary Banco Prosper on Sept. 14, a day after it failed to secure a buyer for the troubled consumer lender.
- The state’s intervention of Cruzeiro was the fourth in nearly two years of a midsized bank specializing in lending to consumers and the second bank failure since the collapse of Banco Santos in 2005 amid allegations of fraud.
- Brazilian senators approved a bill creating a central credit bureau in May 2011, but more detailed rules on how the law will be applied are still awaiting approval. Known as the “cadastro positivo” law, the bill is expected to improve the quality of credit information for lenders. As stipulated, the law gives Brazilians the option to authorize the creation of their credit report. President Dilma Rousseff is expected to sign off on the rules supporting the law so it can go into effect.
- Brazil’s consumer delinquency levels have risen steadily over the past year and a half. Consumer loans in arrears more than 90 days reached 7.9 percent in July, up from 7.8 percent the month before, the highest level since at least December 2010, according to central bank data.
- Reuters: Brazil central bank liquidates Cruzeiro do Sul, Banco Prosper [ ID:nL1E8KE5UY]
Bite the bullet [ID:nL2E8JG4AP]
Belly up [ID:nL1E8H48GT]
- For previous columns by the author, Reuters customers can click on [GALLEGOS/]
(Editing by Richard Beales and Martin Langfield)
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