January 18, 2020

Understand how the credit market in Brazil works

Getting credit is a decisive step in changing a business issue or making a purchase that was not possible before. That is why the credit market in Brazil is so important, because of loans that allow changes. The credit market functions as a system of loans that are provided by financial institutions, public and private banks. Such institutions grant this credit for various purposes and these transactions give rise to what is known as the credit market.

The credit market is a living lending body, it addresses both the lender and the debtor. This credit, is permeated by institutions or banks and is delivered to companies and people.

The financial system and the history of credit in Brazil

credit loan

According to economist Lívia Sendra Coelho, the history of credit in Brazil permeates some disruptive moments:

  • The new fee rules.

In the 1950s, Brazil suffered from high inflation which made it difficult to grant credit. However, the end of this decade represented a strong moment of industrialization, consequently increasing the demand for credit. As a result, several financial companies and credit companies started to operate more heavily in the concessions, representing a moment of growth in the credit market in Brazil.

However, the real change came with the new namesake currency. The real had higher consistency and less inflation. Thus, with greater control over wage and price fluctuations, credit companies began to become more solidified in Brazil. However, only after the real plan period in 1999 did Brazil implement a floating exchange rate regime and inflation targets that directly impacted the financial system in Brazil.

Because of this organization, the agents and financial institutions were able to form price expectations and thus grant loans with lower risks, reducing default in Brazil. In 2013, the changes in credit modalities occur through Provisional Measure 130, in which loans could be granted on consignment, that is, payrolls and payroll accounts, as the salary was deposited, the loan portion was written off.

Credit then functions as a stimulus mechanism for consumption. Through it, there is an increase in disposable income and thus an increase in buying activities.

Major financial market credit operations

market loan

The main credit operations in Brazil vary by type, whether it is a natural or legal person. So, among the credit possibilities, there are:

  • Individuals: payroll-deductible loans, overdraft accounts, credit cards, personal loans, financing, leasing, thirteenth salary advances and others;
  • Legal entity: working capital credit, credit for projects and purchases related to the company, business creation loans and startups, among others.

Due to the diversity of existing credits, the credit market serves to boost the economic system in general. However, due to the high interest rates in Brazil, some institutions tend to be more selective in offering services or lines of credit. Inflation rises and interest rates rise, so there is an increased risk of defaults. Therefore, growing the list of negative debtors and financial institutions without getting their loans back.

Where to get credit and how bank spread works

How to get credit? This issue is intrinsically linked to the institutions that participate in the credit market in Brazil. These institutions include:

  • Private and public banks;
  • Credit unions (association of people who share an investment or loan, reducing interest costs and partitioning amounts among members to generate the full loan amount);
  • Microenterprise Credit Societies;
  • Consortium Administrators;
  • Credit card companies.

These institutions have one thing in common: obviously, the amount I borrow will not be the same as the return. Lending institutions adopt a model equal to the spread model in Brazil. But then, how does spread work? The bank spread is precisely the disproportion between what banks pay in raising funds from an account, in return for the amounts charged when the customer will apply for a loan.

This is exactly why financial institutions offer better conditions for holding amounts or creating savings. However, at the time of granting credit, Brazil still needs to evolve in its rates and especially in the private credit market. So when it comes to making a line of credit or applying for a loan, being at the mercy of the credit market is a risk. Therefore, there is a need for financial education and research on existing credit options before entering into any indebtedness and over-indebtedness contract. You need to understand the credit market, it helps to create this knowledge base and can be the initial push provider for your project. From the moment you know the options, new choices and business forms emerge. More content like this? 

written by Pauline Kunkle - Posted in Credit