Brazil: Lending Rates x Competition

Quick post.

Brazil is known for a very robust, well-regulated banking system. There is possibly also not a lot of competition.

Look at the below paragraph from a sell-side report on Brazilian credit, specifically talking about lending rates:

Lending rates on freely allocated credit declined by 100bp in August (but declined by 780bp over the last six months) to 45.6%. Lending rates on freely allocated credit to individuals declined 150bp in JuAugustly (-1,120bp since Feb) to a still very high 62.3%, and rates on corporate lending declined by 90bp to 24.4%.

Here’s the chart with the trajectory of Lending Rates in Brazil in the recent past:

Brazilian Lending Rates

From the website of the Brazilian Central Bank: number of banks by size. Total banking institutions equal a meager 155.

Now let’s go to the US, from Wikipedia:[…] by 2012, there were only 4,200 banks with less than $300 million in deposits in the U.S., and over 1,800 with more.

What happens to productivity, innovation [or capital misallocation?] if the competition in lending increases? Can leaner lenders (Fintechs?), with much lower fixed cost, reduce these rates and remain competitive?

I mean, if you are a reasonable entrepreneur with a business that can sustain these interest rates you just grow with what you have, right?

When capital is this scarce, what do business men do? Keep it in government bonds.

And if lending rates remain lower for longer as I expect? Big corps lose a considerable edge over smaller competitors.

One step forward is the change in legislation that extinguishes TJLP (Long-term Interest Rates, currently lower than the Selic policy rate). The playing field should be more balanced, leaving more credit supply also for smaller businesses.

* TJLP is a subsidized line of credit provided by BNDES (Brazilian Development Bank) to… mostly large companies that have access to cheaper-than-average credit anyway.

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