MercoPress. South Atlantic News Agency

Brazil tightens consumer credit backed by wages and pensions

Brazilian consumers pay annual rates of up to 200% on credit card balances

Brazil's central bank on Monday tightened rules on credit card loans backed by wages and pensions which households are increasingly using as a source of long-term borrowing.

Commercial banks will have to commit twice the capital they used to when extending payroll- and pension-deductible credit card loans for terms beyond 36 months, the central bank said in a statement.

The so-called risk weight factor, or the amount of capital that banks must set aside for such loans, will remain at 75% for maturities of up to 36 months.

Payroll-deductible loans have grown faster than other forms of loans since their creation in 2003 because they offer less default risks for lenders. But policymakers fear that rapid growth in that segment may hurt households, which are now spending a record 24% of their disposable income on debt-servicing.

The stock of credit card loans represents about 7% of outstanding household loans and only 1.7% of the financial industry's loan book, according to data compiled by Goldman Sachs Group.

Still, consumers pay annual rates of up to 200% for normal credit card loans, the highest borrowing costs for that segment among the world's major economies.

The rules governing the use of minimum payment on credit card balances will stay unchanged, the bank said. Policymakers decided earlier in the year that consumers pay bigger monthly instalments on their credit card bills, in order to decrease their usage and lower the probability of defaults.

The measure was announced just two days before the central bank is expected to raise interest rates for the fifth time this year as it seeks to rein in inflation, most probably to 12.50% from 12.25%.