Bloomberg News

Brazil's 323% Credit-Card Rates May Finally End With Credit Scores

October 18, 2012

President Dilma Rousseff

The legal changes correspond with President Dilma Rousseff’s effort to get banks to cut lending rates after policy makers lowered the nation’s benchmark to a record 7.25 percent last week to help revive growth forecast to be the slowest since 2009. Photographer: Evaristo Sa/AFP/Getty Images

Brazilian President Dilma Rousseff took the final step to enact legislation that may help achieve her goal of reducing the highest credit-card rates in the Americas, 16 months after the measure was approved by Congress.

The government published implementation rules today for a law that paves the way for Brazil to establish consumer credit scores for the first time. The changes open the way for local affiliates of Experian Plc (EXPN) and Equifax Inc. (EFX:US), the world’s biggest credit bureaus, to compile payment histories that previous legislation barred them from accessing.

Brazil’s 323 percent average annual credit-card rates compare with 17 percent in the U.S. and 34 percent in Mexico, according to a study by consumer-defense association Proteste published in July. The legal changes correspond with Rousseff’s effort to get banks to cut lending rates after policy makers lowered the benchmark to a record 7.25 percent last week to help revive growth forecast to be the slowest since 2009.

“The big benefit is you can charge better customers less, and worse customers more,” said Erico Ferreira, the Sao Paulo- based head of Acrefi, Brazil’s association of credit, financing and investment institutions. “You can offer better pricing.”

The law repeals rules that allow card issuers to only gather data on defaults and delinquencies.

Credit Scoring

Credit scoring will help bolster Brazil’s credit card expansion in years to come after lending grew 17 percent in the 12 months through August, compared with 19 percent the year before, said Jose Renato Simao Borges, the former head of credit cards at Osasco, Brazil-based Banco Bradesco SA (BBDC4) who is now president of credit-card issuer Credz.

“In every country where credit scoring was allowed, credit grew 50 percent afterwards,” Borges said in an interview.

Rousseff’s predecessor, Luiz Inacio Lula da Silva, vetoed similar legislation in 2010, citing concerns by consumer groups over privacy rights. Final approval by Rousseff was held up as the government and credit bureaus debated privacy and liability issues tied to collecting the data, according to Boa Vista Servicos, a credit data company 15 percent owned by Equifax.

The new rules allow bureaus to track debt-to-income ratios and payment punctuality and require that consumers provide consent before their histories can be recorded.

Expanded Access

While Rousseff said in a nationally televised address on Sept. 6 that she wasn’t satisfied with banks’ efforts to cut borrowing costs, banks say the rates they charge reflect the risk they take on. Default rates rose to 28 percent in August on credit-card accounts at least 90 days overdue, almost four times the 7.9 percent on consumer loans, according to data from the central bank.

The new rules will expand access to credit for Brazilians whose per capita income is 291 reais to 1,019 reais ($143 to $502) a month, the classification for the nation’s emerging middle class, Dorival Dourado, the president of Boa Vista, said in an interview in his Sao Paulo office. Only 18 percent use credit cards as their main form of payment, compared with 44 percent of those who earn at least 2,480 reais, according to Boa Vista.

“The bureaus will allow companies to know more about these people and create better conditions for lower rates,” Dourado said.

Financial Data

The new rules will quadruple the amount of information regulators have about the financial system, reaching 96 percent of all individual loans, central bank President Alexandre Tombini said in March at an event in Sao Paulo to present the revamped system. They will also help the central bank design measures to ensure the financial system functions soundly, he said.

Average credit-card rates in Brazil could be as much as 35 percent lower should banks be able to get an accurate profile of whom they’re lending to, Dourado said. The old system caused all customers who don’t have a record of default to be treated as equally risky, he said.

While credit can improve the quality of life for Brazilians emerging from poverty, many consumers aren’t prepared for the responsibilities and risks of taking on debt, said Larissa Davidovich, who heads the unit for protection of highly indebted consumers at the public defender’s office in Rio de Janeiro.

A 67 percent surge in lending in Brazil in the last three years as more people became eligible for credit helped push the default rate on credit cards to a three-year high in August, sapping consumer demand and threatening to saddle banks with losses.

Credit Education

“The problem is the accumulation of debt by people who don’t have the education or preparation and aren’t aware of what they’re getting into,” Davidovich said at an event in Sao Paulo held by the association of credit-card businesses. “We are receiving more and more requests from people in drastic situations, like a woman who amassed 14 credit cards.”

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell one basis point, or 0.01 percentage point, to 134 basis points at 10:11 a.m. in Sao Paulo, according to JPMorgan Chase & Co. (JPM:US)

The cost of protecting Brazilian bonds against default for five years rose one basis point to 110 basis points, according to prices compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

Default Rates

The real strengthened 0.1 percent to 2.0292 per dollar. Yields on interest-rate futures contracts due in January 2014 fell two basis points to 7.41 percent.

Personal loan default rates have peaked and will drop amid slowing credit growth as banks stop extending loans to the riskiest borrowers, said Ricardo Loureira, the president of Serasa Experian, Brazil’s largest credit data provider, which is controlled by Dublin-based Experian said in a telephone interview.

Positive credit histories will lead to more credit for those with a record of paying on time and will increase the volume of transactions, he said in a phone interview from Sao Paulo.

“The previous model has been exhausted for the dimensions of credit in Brazil,” Loureira said. “It’s no longer possible to continue managing risk with the previous model.”

To contact the reporter on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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