As the world’s 7th largest economy, Brazil has shown great growth across numerous industry sectors over the past years. Last year alone, Brazil’s economy managed to increase by an impressive 7.5% with the finance ministry predicting an overall annual growth of 4.5% this year. It is interesting to note that Brazilians have peculiar shopping habits that have in a more focused perspective led to far reaching economic implications.
Most retail stores in Brazil now allow residents to buy items and pay for them in installments. This culture has in turn encouraged more Brazilians to spend money on items, which in the first instance, they do not really require.
Latest figures released have indicated a sharp increase in the domestic consumer-borrowing index as a result of increased borrowing by residents in order to gain financial empowerment to purchase items. According to the latest statistics, between 2003 – 2011, an approximately 24.5 million people improved their economic status and moved from those categorized as living below the poverty line to lower income category.
While all these major economic and national growth milestones need to be applauded, analysts have predicted a much serious problem that many residents are completely unaware about. Brazilian residents are hitting the stores every day to buy items with borrowed money from lenders while failing to realize that they are committing financial suicide.
The Central bank has controlled lending parameters and fiscal policies which banks have to adhere to keep bad loans in check. However, banks also have a free leeway to determine the interest rates payable on their loans.
Consumers continuously get enticed to attractive bank loans completely unaware that banks are reaping huge profits as high as 15% compared to an average of 7.5% of their U.S. counterparts as a result of the high hidden interest rates.
Credit card holders are the biggest casualties who unaware of excessive credit card use implications, end up paying skyrocketed interest rates on their credit cards due to poor and haphazard consumer purchasing habits. Retail stores are today reaping huge profits by deceiving consumers that they can cheaply get whatever item they want buy simply making small regular installment payments.
Analysts now warn that haphazard borrowing habits of consumers is negatively affecting the economy as a result of high bank loan default rates facing major Brazilian banks. This has in turn bruised the financial economy with banks digging deeper into their reserves to cater for defaulted loans. Major banks have been forced to substantially boost their bank reserves.
Cases of consumers being declared bankrupt are also on a sharp increase and this is an indication that all is not well in an economic roaring powerhouse such as Brazil. With no credit reference bureaus in place, this further complicates an already worsening situation because consumers with good credit history cannot enjoy any privileges associated with their credit status. The government has an extra burden and can only afford to follow up on loan defaulters.
The freedom to allow consumers flexible purchasing schemes is a welcome idea though analysts are warning that unless urgent credit control measures and strict lending policy regulations are put in place, the country’s economy might end up paying heavily for this new found increased consumer credit purchasing habits. Many Brazilians are now paying the price for careless borrowing habits, which have hugely dented their financial capabilities.
Source: Bloomberg BusinessWeek