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Brazil’s central bank capped the rates of overdraft loans, one of the country’s most expensive forms of credit, as part of central bank president Roberto Campos Neto’s efforts to reduce interest rates charged to customers.
Overdraft loans may not surpass a limit of 8% per month, or about 150% a year, starting on Jan. 6 2020. At present, interest rates on this automatic banking credit averages around 306% a year.
One in five Brazilians used their overdraft facility over the past year, according to a study from the national retail industry union, and 40% used it every month. In a country with double-digit unemployment and poor education in personal finance, most of the people who end up in need haven’t actively asked for the loan and fail to realize that other cheaper options are available.
“We have detected that there was no competition in that type of loan, and setting a ceiling for that rate follows the best international practices,” central bank board member Joao Manoel Pinho de Mello told reporters. “It was a regressive type of loan as the poorer people that use those loans more end up paying for wealthier clients with higher limits that never used it.”
Shares of banks led losses in Brazil’s benchmark Ibovespa index on Thursday. Itau Unibanco Holding SA, Latin America’s largest lender by market value, fell as much as 2% in morning trade, even as Credit Suisse analysts said the impact of the overdraft decision is “far more limited” than headlines may suggest.
“We estimate an average negative impact ranging from about 1% to 3% of 2020 net profit for the large cap banks under our coverage,” the analysts led by Marcelo Telles wrote in a research note, noting that banks will be allowed to charge fees on pre-approved overdraft limits.
Brazil’s banking lobby Febraban said in a statement that, while measures to reduce cross subsidies in the credit system are welcome, authorities’ move to impose official limits and price fixings are cause for concern.
In Brazil, the overdraft loan is currently a pre-approved line of credit. The amount of funds available to each person is directly linked to their personal income, meaning that those who earn more have higher limits. Since the banks have to provide funds for the credit, they overcharge those who actually use the loans to compensate.
The central bank has also allowed banks to charge tariffs to clients that wish to use the emergency loan, while the clients with smaller limits will be exempt from the charge.
Over 19,5 million Brazilians will benefit from the change, according to the central bank. As overdraft loans represent less than 1% of total bank lending in Brazil, the average rates of the total outstanding loans are not expected to drop sharply.
The idea is to allow for a structural reduction of the rate in the same vein as a move in 2017 that allowed the average rate on delayed credit card payment rates to drop from 466% a year level to around 220%. That rate has risen since, and the central bank is looking at ways to tackle that again, Campos Neto said in a public event on Tuesday.
Measures for the emergency credit lines are an old demand from politicians, and Campos Neto himself was questioned by lawmakers in two separate public hearing at Congress last week.
“They needed to do something and something quick to fight the abusive rates charged by banks, specially on the overdraft loans,” Senator Espiridiao Amin said. “If no action was taken, I would have to vote against the future central bank board nominees, because a policy change would be necessary.”
(Updates with impact on bank shares, comments from analyst and Brazil’s banking lobby on paragraphs 5-7.)
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