(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
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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- 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)
Keywords: BREAKINGVIEWS BRAZIL/BANK
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