Image: Andrzej Rostek

As Brazil grapples with having 63 million of its population in debt, the National Monetary Council continues to take steps to slash default rates. Now, the council has nearly halved interest rates on overdraft credit. Starting on January 6, 2020, Brazilian banks will not be allowed to charge more than 8 percent a month for overdraft fees—bringing annual interest down to 150 percent.

The Central Bank says the move will help correct a major distortion in Brazil’s financial system, as this form of credit is used by people with less financial education and lower income. On the other hand, regulators allowed banks to charge monthly tariffs of 0.25 percent on overdraft limits higher than BRL 500.

Good news for consumers? Maybe. But certainly not for banks.

</p> <div class="flourish-embed" data-src="visualisation/1010468"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>How markets reacted</h2> <p>Shares of Brazil’s largest private banks—Itaú Unibanco, Bradesco, and Santander Brasil—were down on Thursday, which, according to analysts, is a direct consequence of the decision. At 1:13 pm (Brasília time), the market index which measures the performance of publicly-traded financial institutions was down 0.52 percent.&nbsp;</p> <p>XP Research labeled the new rules as &#8220;quite negative.&#8221; Though overdraft credit for individuals accounts for only BRL 26 billion—or 0.8 percent of the credit available in Brazil&#8217;s financial system—“the high spreads create relevant margins for the banks,” reads one <a href="https://conteudos.xpi.com.br/acoes/analises-fundamentalistas/relatorios/bancos-banco-central-limita-juros-no-cheque-especial/">report</a>.</p> <div class="flourish-embed" data-src="visualisation/554393"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>The analysts also added that the possibility of charging extra tariffs will not add new revenue for banks. Actually, it worsens customer experience which, “in a highly competitive scenario, with fintechs and new players getting more and more aggressive, is a good measure of banks.”</p> <p>In fact, <a href="https://conteudos.xpi.com.br/morning-call/alteracao-das-regras-para-o-cheque-especial-e-discussoes-comerciais-em-destaque/">in another report</a>, analysts added that charging new overdraft fees tends to lead current account clients to opt-out of this form of credit and reduces demand for it on new accounts. While it would cut revenues related to tariffs charged on credit, it goes hand in hand with the Central Bank’s goal to make Brazilians use overdrafts in a more rational way.</p> <p>For brokerage firm <a href="http://mkt.guideinvestimentos.com.br.s3-sa-east-1.amazonaws.com/Guide%20Empresas%20%2828_11_19%29.pdf?_ga=2.190202530.806220735.1574950554-371755415.1569590461">Guide Investimentos</a>, the biggest issue with the council&#8217;s move is that it caught banks off guard. Analysts highlight that, while changes in regulations were expected, an interest cap had not been foreseen. “Though it is hard to measure the impact on each institution, we expect this to be less negative than 2017 changes to credit card fees, as there is less available overdraft credit.”</p> <div class="flourish-embed" data-src="visualisation/1010256"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>According to <a href="https://br.reuters.com/article/businessNews/idBRKBN1Y21MV-OBRBS"><em>Reuters</em></a>, Credit Suisse foresees a hit of BRL 2 to 6 billion—or between 1 and 3 percent of the projected 2020 net profits for the banks it analyzes.</p> <p>Brazil&#8217;s monetary council also passed two new regulations considered to be bad for banks. Clients now may transfer their overdraft debts to other institutions, and credit cooperatives may create savings accounts to use them for mortgages (following rules according to their combined net worth).</p> <p>Both rules, however, tend to <a href="https://brazilian.report/money/2018/08/13/brazilian-banks-profits/">boost competition</a> in the financial sector.

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PowerNov 28, 2019

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BY Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.