Overdrafts: Brazil’s expensive addiction

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Sick of paying high rates on your overdraft? Well just be grateful you don’t live in Brazil. The overdraft interest rate rose to 188 per cent a year in July – the highest since 1999.

But what is more extraordinary, perhaps, is that Brazilians are willing to pay that much. According to local newspaper O Estado de S. Paulo, Brazil’s banks currently make about R$3.5m a day giving out overdrafts to these desperate customers.

No wonder angry protests about interest rates are a common sight on São Paulo’s streets.

With higher rates than credit cards or personal loans, overdrafts are considered the last resort for Brazilians looking to make ends meet or, as is often the case, buy the latest plasma TV.

The growth of credit in Brazil has played a vital role in the country’s recent economic success but it has also created a potentially dangerous mindset among its consumers. Paying in instalments has become the norm, for everything from socks to plastic surgery, and the concept of ‘value’ has long been replaced by ‘affordability’. That is to say, millions of young Brazilians are growing up thinking that it’s okay to buy a new computer on extortionate rates as long as you can afford the monthly payments.

Never mind if it is actually worth that much.

But what does this mean for the financial ecosystem as a whole? Well it does not necessarily imply Brazil is heading for some apocalyptic credit bubble.

In fact, bank credit growth actually slowed in July thanks to government measures to restrict lending.

Brazil’s banks have some of the strictest regulation in the world as a result of surviving decades of economic crises at home, credit penetration is relatively low in areas such as real estate, and leverage is still very much a novelty.

However, as economists such as Tony Volpon of Nomura Securities recently argued here on beyondbrics, one day that overdraft will run out, there will be no room in the monthly salary for more installments, and the spending spree will have to stop.

Brazil’s economic slowdown may end up being even more abrupt.

Related reading:
Brazil risks tumbling from boom to bust, FT
Brazil credit bubble fear as defaults rise, FT
Brazil’s credit bubble: getting scary, beyondbrics
Brazilian credit: big threat to growth, beyondbrics
Brazil credit bubble file, beyondbrics

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