Cutting the Costs of Lending

Aug 30, 2003

Wildly expensive credit persists in Brazil. The country's banks need to lower their costs to narrow spreads and expand vitally needed lending.

The arrival of a Workers Party government led by Luis Inácio Lula da Silva, baying for the blood of millionaire "speculators" who had enriched themselves at the people's expense, was a Brazilian banker's worst nightmare. Lula's government has turned out to be very different, following promarket policies that it hopes will eventually bring down interest rates. However, the Finance Ministry under the command of a pragmatic, technocratic team, says there is a lot that can be done to reduce rates in the meantime by making the financial system more efficient. It says the high interest rates - both in nominal and real terms - that banks charge for loans is a serious obstacle to growth and it plans a number of measures to deal with the problem. The gap between inflation and the CDI interbank rate has averaged 1.04 percentage points a month since 1998. Even though inflation is flat, the central bank has set its base Selic interest rate at a crushing 22% a year....

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