Brazil’s recent move to broaden payroll-deductible lending for private-sector employees has produced a dramatic increase in lending volumes while pushing up consumer delinquencies, central bank data show.
The lending program - a key part of President Luiz Inacio Lula da Silva’s efforts to expand access to lower-cost credit - has seen outstanding balances climb quickly this year, but that growth has not come without higher default rates. The central bank on Thursday released data indicating the product is driving new borrowing, not merely substituting for more expensive debt, a finding that challenges government claims the overhaul would reduce financing costs without stimulating consumption or inflation.
Payroll-deductible loans were previously available in Brazil, but access depended on bilateral agreements between individual employers and lenders. The rule change opened the scheme to all formal private-sector workers, including domestic and rural employees, and unleashed a wave of lending that moved faster than some market participants had anticipated.
Central bank figures show the outstanding balance for payroll-deductible loans rose 47.8% in the first six months of the year and 143.1% over 12 months, making it the fastest-growing segment among major credit categories. The loan stock reached 113 billion reais in June - nearly triple the amount recorded before the regulatory change and far sooner than the four-year expansion timeline initially projected by the banking lobby group Febraban.
At the same time, credit quality in the segment has deteriorated. Delinquency for the product climbed to 8.6% in June, the highest level on record for payroll-deductible loans. Defaults within the program rose by 3.1 percentage points this year alone, the largest increase among individual lending categories, compared with an average rise of 0.5 percentage points for non-earmarked consumer credit.
Fernando Rocha, statistics chief at the central bank, described both the rapid expansion of lending and the accompanying rise in delinquencies as "quite significant." He noted that a government measure cleared in late June allowing lenders to use workers’ FGTS severance fund balances to repay overdue loans strengthens guarantees and could help limit future defaults. The FGTS fund is an employer-funded severance mechanism from which employees can draw under certain conditions, such as job loss.
Even with this insurance-like mechanism added, Rocha cautioned there is no statistical evidence the delinquency trend has peaked. "The product has expanded very rapidly since its creation, and most of the operations appear to be new borrowing," he said. "Credit is growing at a pace that may be exceeding income growth, so it is possible that it is contributing to household indebtedness."
The rise in payroll-deductible lending and higher defaults come amid Brazil’s broader macroeconomic context. The central bank began easing interest rates in March, but the benchmark Selic rate remains at 14.25%, leaving Brazil with one of the highest real interest rates among major economies. Policymakers are balancing the aim of expanding cheaper credit against the central bank’s mandate to bring inflation back to target.
Separate central bank data released on Thursday showed household indebtedness barely fell in May despite a broad debt-renegotiation program launched the same month by the Lula administration ahead of October’s election. The share of household income devoted to servicing debt continued to climb and reached a record 28.5%.
The central bank statistics paint a picture of a credit product that has expanded rapidly, stimulated fresh borrowing, and coincided with rising strain on household finances. The regulator’s comments and the late-June policy to allow FGTS balances to cover overdue payroll loans signal efforts to shore up loan guarantees, but the trajectory of delinquency rates remains uncertain.
Exchange rate used in calculations: ($1 = 5.0678 reais)