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Inflationary pressure and rising interest rates reinforce warning of harmful credit practices

After two years of the pandemic and with the current global scenario, the words moderation and caution have appeared frequently in discussions about the direction of the economy. The same is true in Brazil. Challenges that were previously under control, such as defaults, or that were less pressing, such as inflation and rising interest rates, have gained momentum in recent months and tend to have a significant impact on 2022.

In the credit market, which saw significant expansion last year, expectations are also aligned with the uncertainties of the moment, with lower growth expected this year. A survey of the credit bureau sector estimates that the index will remain close to 7%. This forecast contrasts with consolidated data from the Central Bank for 2021, according to which the National Financial System's credit volume increased by 16.5% compared to 2020, reaching R$ 4.7 trillion.

Against this backdrop, good credit practices become even more important. They ensure a sustainable and efficient credit ecosystem by incorporating the latest technological and structural innovations in the sector - such as the Positive Registry, Open Banking and credit fintechs. These innovations allow more individuals and companies to access credit under better conditions. They also ensure that the market functions better at a time still marked by the recent health crisis and the tension surrounding the Russia vs. Ukraine issue. It is therefore appropriate to redouble our attention to bringing into the discussion actions that could hinder the proper functioning of the country's credit system.

Some of the practices that damage credit are those that jeopardize transparency in the relationship between lender and borrower. Credit bureaus are responsible for managing databases in order to provide clarity between the parties. In other words, on the one hand, they offer credit providers information for decision-making, which refers to payment, but goes beyond it. At the other end of the spectrum, for those seeking resources, the bureaus make available, in addition to a credit score and also free of charge, content that contributes to financial education. There are also other services and information such as renegotiation opportunities, anti-fraud alerts, CPF and CNPJ queries, analysis by profile and by sector, among others, so that a person or company can better assess credit conditions, including negotiating rates, payment conditions, guarantees, etc.

Any action that interferes with the harmony of this dynamic, regulated by the Positive Registry Law, the Consumer Protection Code (CDC) and the General Data Protection Law (LGPD), has negative effects on the credit ecosystem, such as the following:

Deletion of negative information: the practice of excluding negatives from credit information creates economic and legal uncertainty for those who offer credit and play an important social and economic role in the country. Entities or companies for this purpose, which constitute the so-called "name clearing industry", are created for economic gain and cause negative impacts on consumers and companies, encouraging default. Economic agents, aware that transparency in access to relevant information for credit assessment protects people and companies from the risk of becoming indebted beyond their capacity, have developed mechanisms to mitigate what is one of the most serious market failures of current economic policy. One of these initiatives was the hiring of legal and economic opinion on the effects of these injunctions on the credit market which grant the suppression of denial notices and which will guide the sector's future measures to combat this scenario of predatory litigation.

Restricting the use of information: restricting the use of relevant financial information for credit analysis distorts credit assessment. Proper risk analysis - which takes into account the information in the bureaus' databases - helps the creditor to conclude whether the borrower is able to honor the payments related to the credit operation. Restrictions increase the risk that the borrower will default, harming both the creditor and the defaulter.

Limitations in recording information: In the same vein, limitations on the recording of information for the purposes of analyzing the granting of credit end up creating data asymmetry and biased credit. In other words, they can also result in an increase in the creditor's risk of payment and the borrower's over-indebtedness.

Increased costs related to information: the increase in costs related to the information used for credit analysis is also detrimental to the market, as it contradicts the purpose of sharing, creating a barrier to access to information. It is important to note that the databases that provide credit analysis perform a function in the public interest.

Bureaucratization of the debt negotiation and payment processfacilitating or simplifying the forms of renegotiation reduces the length of time the debtor remains on the debt registry and encourages good behavior on the part of the payer. In addition, complex collection processes, which involve several stages to settle a debt, often hinder the dynamics of recovery. Making payment methods more flexible strengthens the relationship between creditor and borrower.

Increased costs for the borrower to pay off the debt: the increase in the cost of settling the debt is another practice that penalizes consumers and companies, raises the debt, compromising repayment. Efficient collection, as well as all the measures that support a responsible ecosystem, encourages credit recovery.

The bureau sector's proposal to democratize access to its products and services, facilitate renegotiation, promote transparency and reduce bureaucracy throughout the entire credit granting and collection process, provides for a healthy credit market. This, in turn, stimulates the economy, generating jobs and promoting social welfare in the country, an important condition for recovery in the aftermath of the pandemic.

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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor