Brazil economy: Non-performing loan ratios continue to ease

Event

According to the January monetary policy and credit operations report, released under a new methodology on February 26th by the Banco Central do Brasil (BCB, the Central Bank), the consumer non-performing loans (NPL) ratio fell from 5.6% in December 2012 to 5.5% in January. The corporate NPL ratio remained unchanged, at 2.2%. This suggests an improving credit risk as the monetary easing cycle improves debt-servicing capacity and households continue to strengthen their balance sheets.

Analysis

As part of its efforts to support a weak economy, the government of the president, Dilma Rousseff, has focused on supporting credit growth to the private sector through an easing cycle that has cut the Selic policy rate from 12.5% in August 2011 to a record low of 7.25% since October 2012. It has also directed public banks to lower their commercial lending rates and has been applying moral suasion on private banks to follow suit. The Treasury has also made large transfers to the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, the state development bank) for on-lending to companies at heavily subsidised rates, based on the benchmark TJLP long-term rate, which was cut to 5% in January 2013.

As a result of these efforts, commercial lending rates have registered important drops in the course of 2012: commercial lending rates for businesses were 18.8% in January (an increase from 17.9% in December 2012 but substantially down from 24% in January 2012) while those for consumers were 34.5% (up from 33.9% in December but significantly lower than the 41.1% rate in January 2012).

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