What are the variables that influence the banking spread?

Follow on Google News

One of the subjects most covered by the press is banking spread. In recent months, the economy's basic interest rate has fallen to its lowest level on record. The Selic is now at 6.5%, but the rates charged by financial institutions on loans and financing have not been reduced in the same proportion. This is because the spread generally follows the basic interest rate. This, by the way, is one of the discussions that are present in society. Consumers and entrepreneurs, especially micro and small business owners, wonder why credit hasn't become cheaper.

Before understanding the variables that influence the banking spread, it's worth remembering what this term means. It is the difference between the cost of money for the bank, i.e. how much it pays when it takes out a loan, and how much it charges the consumer when it grants credit.

In a scenario of Selic At a low level like the current one, banks pay less for the funds they raise on the market, since many investments pay interest linked to the Selic rate. Therefore, if the Selic is at a lower level, there is more room for a drop in the rates charged when granting credit.

According to Febraban (Brazilian Federation of Banks), the explanation for why the banking spread is still high lies in its composition. There are factors that are part of the spread that are not related to the Selic rate, i.e. the cost of funding. See below for each of the factors preventing the spread from falling.

1) Default

The high level of default, which currently affects more than 60 million Brazilians, means that banks have to deal with a high risk when granting loans. As a result, the banking spread is higher, since financial institutions have built in the expectation of loss from non-payment of the loans granted. Data from 2017 provided by the Central Bank indicates that default accounts for 55.7% of the banking spread.

The approval of the new Cadastro Positivo bill will mean that good payers will not be penalized by the cost of default. This bill has the potential to reduce defaults by up to 42% because it enables financial institutions to carry out a more accurate analysis of the borrower's ability to pay, which should result in fairer interest rates on loans and financing. It also brings about the democratization of credit in Brazil.

2) Taxation

Not only the taxes levied on loans, but also the compulsory deposit, both term and sight, affect the spread. The government increases or decreases the compulsory deposit according to its desire to withdraw or inject money into the Brazilian economy.

3) Difficulty in recovering credit

Recovering credit in court is expensive and difficult. On average, the bank waits around four years to recover the credit granted. In other countries, this wait is less than two years. What's more, financial institutions recover the collateral in only 16% of loans granted with collateral - the average is 59% in other countries.

4) Administrative expenses

The amount spent on maintaining the branches, which are located in various Brazilian municipalities, even though some of them are not so economically relevant, and on employee remuneration is high. This cost is part of the banking spread and is passed on to the consumer.