Brazilian governments have long tried to lower the banking system’s very high interest rates. But while there has been a broad consensus on the negative impact that high banking costs have had on broader economic and financial growth, the policies used by different governments have been very different.
Dilma Rousseff, for example, pressured the central bank to push the base rate down and got the country’s public banks to lower the spread they charged above that rate in an attempt to get the private-sector banks also to lower their net interest margins. Both policies backfired spectacularly: the artificially-low interest rates led to surging inflation, which was also fed by the fiscal expansion created by using the public banks as a macro-prudential tool.
Ironically, the result was much higher interest rates.
However, under Ilan Goldfajn, president of Brazil’s central bank since June 2016, the country finally has the right person, in the right job, to target the problem.
There are many aspects to lowering inflation, but one of Goldfajn’s first policy decisions was to change the country’s credit scoring system from a default of opt-in to opt-out. That simple change is set to have a truly radical impact on the availability and cost of credit. All financial institutions (as well as retailers and other businesses) will soon have access to detailed and accurate credit scores for the vast majority of Brazilians.
This will increase competition for credit, lower costs, lower default rates and increase consumption. Santander estimates that it will lead to a reduction in the average interest rates charged to individuals by between 2 and 2.8 percentage points – roughly one-fifth of the ‘spread bancario’. The bank also thinks it will directly lead to a medium-term increase in credit in the economy equal to 10% of GDP. Estimates say 25 million people will be added to the country’s formal banking system.
And all this positive growth comes just from changing the system to opt-out rather than opt-in. The positive credit bureau was originally designed this way but, being Brazil, the largest banks managed to lobby for the change to a default of opt-in, which critically weakened coverage and therefore enabled the large banks to retain their competitive advantage – derived from their large proprietary databases.
Goldfajn has returned to the bureau’s original purpose – and effectiveness.
However, being Brazil, the fintech startup leading the way to market with this positive credit data, Quod, was created and is owned by the five largest banks: Banco do Brasil, Bradesco, Caixa Economica Federal, Itaú Unibanco and Santander.
Nevertheless, these banks’ ownership of Quod should not weaken the wider economic benefits that should flow from the availability of this new credit data. Banking competition will increase as smaller – and emerging – lenders can accurately price individual and corporate risk. Credit costs will fall and volumes will rise, feeding increased investment and consumption.
And Quod’s shareholders will also benefit from greater transparency as they seek to build volumes to compensate from what, finally, promises to be a lower interest rate environment.
Sometimes it is worth reflecting that while emerging market headlines usually focus on large and difficult structural reforms, there are many quick and easy micro-reforms that can be just as transformative.