Lula's payroll loans boom, but Brazilian defaults spike too

By Marcela Ayres

BRASILIA, July 30 (Reuters) - Brazil's payroll-deductible ‌lending program for private-sector ​workers, part ​of President Luiz Inacio Lula da Silva's push to expand access to cheaper credit, grew explosively in the first half of the year while also boosting consumer delinquencies.

Data released by the central bank on Thursday ‌suggest the program is generating new borrowing rather than simply replacing more expensive debt, challenging the ⁠government's argument that the initiative would lower financing costs without fueling consumption or inflation.

Leftist Lula hailed the overhaul when it was launched last year as a "revolution," ‌though some analysts warned it could ‌increase household indebtedness and complicate the central bank's efforts to cool the economy.

The debate comes as Brazil seeks to bring inflation down to target. Although the central bank began easing rates in March, the benchmark Selic remains at 14.25%, leaving ​Brazil with one of the highest real interest rates among major economies.

Payroll-deductible loans were already available in Brazil, but access depended on agreements between individual employers and lenders. The new rules opened the program to all formal private-sector workers, ⁠including domestic and rural employees, unleashing a wave of new lending.

The outstanding balance of these loans climbed 47.8% in the first six months of the year and 143.1% ​over 12 months, by far the fastest growth among major credit categories, the central bank data showed.

The stock of loans reached 113 billion reais ($22 billion) in June, nearly triple the level seen ​before the rule change and far sooner than the four-year period ‌the banking lobby group Febraban had initially projected for such expansion.

The boom has been accompanied by a sharp deterioration in credit quality.

Delinquency in the segment rose to 8.6% in June, the highest ⁠level on record for the product. Defaults within the payroll loan program have increased 3.1 percentage points this year alone, the largest rise among lending categories for individuals in non-earmarked credit, which rose an average of 0.5 percentage points.

Central bank statistics chief Fernando Rocha described both the ⁠expansion in lending and the increase in delinquencies as "quite significant."

Rocha said at a press conference that a new government measure, cleared in late June, ​allowing lenders to repay overdue loans using workers' FGTS severance fund balances, represented a major strengthening of guarantees and could help contain future defaults. Employees can draw from the fund balances, which are a mandatory employer-funded severance system, under certain circumstances, such as loss of a job.

Still, ‌he cautioned there was no statistical evidence that delinquency rates had peaked.

"The product has expanded very rapidly since its creation, and most of the operations appear to be new borrowing," Rocha ‌said.

"Credit is growing at a pace that may be exceeding income growth, so it is possible that it is contributing to household indebtedness."

Separate central ⁠bank data released on Thursday showed household indebtedness ‌barely declined in May, despite a broad ​debt-renegotiation program launched the same month by Lula ahead of October's election. The share of income committed to debt servicing continued to rise, now at a record 28.5%.

($1 = 5.0678 reais)

(Reporting by Marcela AyresEditing ‌by Rod Nickel)

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