|Putting his head above the parapet: Ilan Goldfajn, president of Brazil’s central bank|
Ilan Goldfajn, president of Brazil’s central bank, is seeking to lower the very high credit spreads charged by the country’s banks to its clients in the ‘free market’ credit segments.
Goldfajn tells Euromoney, in a wide-ranging interview that will be published in its March edition, that he is studying reforms to the banking sector that will both lower spreads by reducing costs and by encouraging greater competition among banks.
“We are working on having credit spreads fall,” he says. “And that has several elements. A few of the elements are [related to the] cost and complexity of the system, such as taxes and reserve requirements. But there is also [a requirement for] a little bit of competition enhancement.”
Goldfajn proposes to increase competitive forces through enhancing the country’s positive credit bureau – to help banks price the credit risk of potential new customers – and lessening the regulatory burden for the smaller banks. The central bank is also looking to improve and standardize real estate documentation to encourage greater secured lending.
“The list of good clients is there,” says Goldfajn. “The law has been approved, but it is incomplete and the [regulations] are quite demanding to put good creditors on the list – and they have to agree. We suggest that the opt-out is better. If you are a good debtor you will be on the list unless there is some reason you don’t want to be – which will make the list much more complete.”
At some point we would also like to increase competition and at that point you have a less cooperative environment. But so far so good
- Ilan Goldfajn, Brazil’s central bank
Goldfajn is also committed to studying other liberalization measures, such as obliging Brazilian banks to set up direct debits to all third-party companies. One CEO of a newly formed fintech that offers short-term unsecured loans to SMEs and consumers with low credit scores told Euromoney that he would be able to cut his interest rates by 10% if banks were obliged to set up direct debits to his online platform.
The central bank’s credit data for December, published at the end of July, highlight the problem. Total free market credit spreads actually fell for the second consecutive month in December but were still at 40.2% (59.2% on consumer and 16.9% on corporate loans) and this followed 10 months of increases.
And despite the country suffering its biggest-ever recession – with data showing the economy is now the same size as it was in December 2009 – the local banks continue to report high profitability. Itaú’s 2016 fourth-quarter results reported net profit of R$5.7 billion ($1.8 billion), a return on equity of 19.7%.
Announcing his bank’s results, Roberto Setúbal, CEO of Itaú, acknowledged that the ‘spread bancario’ in Brazil is higher than elsewhere in the world and said that is because they reflect “the default risks in Brazil, with credit being much riskier than in other parts of the world”. He said “a very relevant part” of the high spread “includes the premium that the bank charges to assume the risk”. In its fourth-quarter results Itaú’s non-performing loan ratio fell by 10 basis points to 3.7% (consumer NPLs declined 20bp to 3.9% and the corporate rate held steady at 3.5%).
Setúbal also pointed to high external costs and taxes, as well as welcoming the improved credit data planned by the central bank: “If we have more information we can reduce the risks of loans.”
Controlled credit sector
Meanwhile, Angel Santodomingo, CEO of Santander Brasil, tells Euromoney that the presence of a large ‘earmarked’ or controlled credit sector in the economy was a large driver of the high spread on free market credit. About 50% of the total credit market in Brazil is comprised of mandated loans that have subsidized interest rates – such as the 75% TLJP rate, which is levied on most BNDES loans. These sub-Selic (official overnight) rates both increase the interest rates applied to free market credit and lower the transmission of monetary policy.
“It’s like the meia entrada (half-price) ticket to go to a football game,” he says. “If a lot of people are paying that then the rest have to pay 1.5x the normal price of a ticket.”
Santodomingo says the country’s banks are working to help Goldfajn shape his reforms: “We welcome anything that will move the sector from the current position to a more liberalized concept and how we can lower the cost of risk,” he says. “If all the operational costs that are within the spread go down – and Selic goes down – then the yield the client will pay will naturally go down. There is no intention from anyone to have these high yields.”
However, Goldfajn has also signalled that he wants to see banks cut their margins beyond the proposed reduction in operational costs. He says: “I think that there is at this point a comparative goal – everyone wants lower spreads because part of the spread is still cost. So when you plan to reduce costs everybody is behind the same goal. Of course at some point we would also like to increase competition and at that point you have a less cooperative environment. But so far so good.”