Credit is a difficult issue in Latin America. Credit card APR interest regularly runs at 30-50 percent, upwards of five times what it is in North America. Bank loans are not a lot cheaper. Yet more than ever Brazilian consumers are borrowing and financial institutions are encouraging them to do so.
When I recently opened up an account at Itaú, Brazil’s biggest private sector bank, I was surprised to see that the checking account automatically included a 500R line of credit on the account (equal to about one month’s minimum wage), with an interest rate of 138 percent per annum. So if I have no money in my account and start dipping into this line of credit, I will be paying close to 12 percent interest per month on my debt. These sorts of interest rates can only be qualified as usurious.
The combination of Brazil’s lofty real interest rates (among the highest in the world), the priciness of imports (due to tariffs), economic optimism among Brazilians, rising inflation, the global surge in the price of food stuffs, and the increasing availability of credit, it is no wonder that the Folha de São Paulo recently reported that debtor defaults were up by 25 percent in January, 2011– the highest level since 2002. What are the consequences? The poor and uneducated get hit hardest, and higher defaults inevitably raise the cost of capital (and debts) even further. Is it time for greater regulatory control?