July 18, 2011 / 6:50 PM / in 7 years

Brazil tightens credit card usage as rates rise

* Move to curb long-term financing through credit cards

* Brazilians pay highest rates among major economies

* Steps come amid concern of excess household borrowing

By Guillermo Parra-Bernal

SAO PAULO, July 18 (Reuters) - Brazil’s central bank on Monday tightened rules on credit card loans backed by wages and pensions which households are increasingly using as a source of long-term borrowing.

Commercial banks will have to commit twice the capital they used to when extending payroll- and pension-deductible credit card loans for terms beyond 36 months, the central bank said in a statement.

The so-called risk weight factor, or the amount of capital that banks must set aside for such loans, will remain at 75 percent for maturities of up to 36 months.

Payroll-deductible loans have grown faster than other forms of loans since their creation in 2003 because they offer less default risks for lenders. But policymakers fear that rapid growth in that segment may hurt households, which are now spending a record 24 percent of their disposable income on debt-servicing.

“This is simply a prudential measure, of which we would like to see others being implemented to strengthen the financial system against gyrations in the credit cycle,” Paulo Leme, Goldman’s managing director for emerging markets research, wrote in a note to clients.

    The stock of credit card loans represent about 7 percent of outstanding household loans and only 1.7 percent of the financial industry’s loan book, according to data compiled by Goldman Sachs Group.

    Still, consumers pay annual rates of up to 200 percent for normal credit card loans -- the highest borrowing costs for that segment among the world’s major economies.

    The rules governing the use of minimum payment on credit card balances will stay unchanged, the bank said. Policymakers decided earlier in the year that consumers pay bigger monthly installments on their credit card bills, in order to decrease their usage and lower the probability of defaults.

    Shares of Cielo (CIEL3.SA), the country’s biggest card payment processor, rose 0.9 percent on Monday -- the first increase in three sessions. Shares of rival Redecard RDCD3.SA gained 1.4 percent.

    The measure was announced just two days before the central bank is expected to raise interest rates for the fifth time this year as it seeks to rein in inflation.

    All 21 analysts polled by Reuters see the benchmark Selic lending rate BRCBMP=ECI rising by 25 basis points to 12.50 percent from 12.25 percent. [ID:nE5E7HT005] (Editing by Todd Benson and Andrew Hay)

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