UPDATE 1-Brazil's loan defaults in decline -central bank
* Central bank report shows rise in household indebtedness
* But debt service burden lessened by lower interest rates
* Brazilian banks remain solid with high liquidity
BRASILIA, April 3 (Reuters) - Brazilian households are defaulting less on their loans thanks to their country's falling interest rates, even as families get further into debt, the central bank said on Wednesday.
"Recent credit disbursements show lower delinquency rates and less arrears compared to loans granted in 2010 and 2011," central bank director Anthero Meirelles said during the release of its semiannual financial stability report.
The drop in Brazilian interest rates to their lowest levels in recent history has helped revert the upward trend in loan delinquencies in a country where consumers use credit to buy everything from bread and milk to cell phones and cars.
That adds strength to a local banking system that is solvent, enjoys high liquidity and is largely immune to the lingering financial woes in Europe, Meirelles said.
Brazil's central bank last October cut its benchmark Selic interest rate to an all-time low of 7.25 percent to stimulate demand and spur a flagging economy.
The central bank's report on Wednesday showed the debt level of Brazilian families climbed slightly to 43.4 percent of disposable income in December from 43.2 percent in June.
Meirelles said families owe more because they are taking out more mortgages, a segment of credit that will likely keep expanding. A surge of the middle class over the last decade has increased demand for mortgage loans as millions of Brazilians buy homes for the first time.
Although families are taking on more debt, the burden of their debt payments fell to 21.9 percent of their income in December from 22.9 percent in June, the report said.
"This is explained by the drop in interest payments as a result of the recent and significant reduction in rates," the report added.
Meirelles said that household's debt burden will likely hover around 20 percent as families refinance their debts with loans that have lower interest rates and longer maturities.
Years of red-hot credit growth caught up with debtors and lifted loan delinquencies to record highs, prompting banks to be more cautious with their lending.
Loan default rates in Brazil have remained naggingly high over the past year even after falling slightly to 5.6 percent in February from 5.7 percent in January.
President Dilma Rousseff has pressed private banks for months to grant more loans to help boost an economy that has struggled to recover despite lower financing costs.
Her government has eased reserve requirements for banks and reduced taxes on some credits to bolster long-term financing for massive infrastructure projects ahead of the 2014 soccer World Cup and 2016 Olympics. Rousseff is scrambling to lift investment that has been the Achilles heel of the Brazilian economy.
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