* Lending rises at slowest pace since April 2010 * Private sector banks put brakes on new lending * Default ratio stabilizes; trend looks unclear By Guillermo Parra-Bernal and Alonso Soto SAO PAULO/BRASILIA, July 26 (Reuters) - Lending in Brazil grew at the slowest pace in four months in June as private sector lenders put the brakes on credit disbursements to arrest a surge in delinquencies. Outstanding loans rose 17.9 percent in June from a year ago, down from 18.3 percent in May, the central bank said on Thursday. June's expansion was the slowest since April 2010 on an annual basis, signaling credit growth is converging toward the central bank's 15 percent target for 2012. Foreign and local private banks originated loans in June at a much slower pace than their state-run rivals as torrid growth in risky segments such as auto lending since 2009 sent defaults soaring. State bank loans grew at seven times the pace of private sector rivals in June. The numbers underscore growing caution among banks as Brazil enters what could be a second year of slowing economic growth. Itaú Unibanco Holding and Banco Bradesco, the country's top two private sector lenders, cut their forecasts for loan growth for this year, citing an economy that is cooling not long after it had appeared to overheat. "Private banks see this as a problem of profitability and they will remain cautious as conditions in the economy require them to be," said Alberto Ramos, chief Latin American economist with Goldman Sachs Group in New York. "So far, there are no signs that growth is gaining significant momentum." This new-found caution is pitting private banks against the government, which has used state lenders Banco do Brasil and Caixa Econômica Federal to bring down the cost of credit to businesses and consumers, and boost access to credit. Outstanding loans expanded 1.5 percent in June to 2.167 trillion reais ($1.07 trillion) from May, after an increase of 1.7 percent in the previous month, the central bank said. State banks disbursed 2.6 percent more credit in June on a sequential basis, compared with a 0.9 percent expansion for credit at foreign lenders and 0.4 percent for local private sector banks. Loans to small-sized companies led the way in the month with a 3 percent sequential expansion, the central bank said. Consumer lending rose 0.9 percent, lagging behind a 1.7 percent expansion in payroll-deductible lending and a 2.8 percent in mortgages. As consumers deleveraged, the balance of the costlier types of credit fell. New overdraft loans contracted by 3.3 percent from May, while credit card lending was flat in the month. "Eventually, private sector banks will join the bandwagon but certainly not in the very short term," Ramos said in a telephone interview. STABLE DELINQUENCIES, AT LAST? Itaú and Bradesco, as well as Banco Santander Brasil , all of which released second-quarter earnings this week, have kept a prudent tone over future trends for loan delinquencies through year-end. Santander Brasil's profit slumped in the quarter after a spike in loan delinquencies forced the nation's largest foreign lender to raise bad loan provisions by 23 percent. An economic recovery expected to gain traction should ease recent increases in delinquencies and put a lid on provisions, Chief Executive Marcial Portela Álvarez said. Non-performing loans fell from an all-time high in June, partly because banks fine-tuned their risk assessment models to account for less creditworthy borrowers. Loans in arrears for 90 days or more, the most-widely used gauge for loan delinquencies in Brazil, fell to the equivalent of 5.8 percent of outstanding credit last month, from 5.9 percent in May, the central bank said. Forward-looking indicators for delinquencies showed modest improvements, which made some analysts ponder whether default ratios in Brazil are headed for declines in the short term. "While delinquency has declined from May, such decline is lower than what should be expected by the favorable seasonality," Credit Suisse Group analyst Marcelo Telles said in a report. "This reinforces our view of rising delinquency until the third quarter." Earlier this week, central bank President Alexandre Tombini, like most banking industry executives, said that loan delinquencies should stabilize in the middle of the year and then fall. Yet, some executives worry that the strategy of using state banks to stoke lending, advocated by Brazilian President Dilma Rousseff, is poorly timed and may foment irresponsible lending among some private sector banks wary of losing market share to Banco do Brasil and other state lenders. Increased competition has delivered some good news for borrowers since April, when Rousseff kicked off her campaign against Brazil's sky-high rate spreads. Spreads, or the difference between the rate at which banks lend and raise funds from depositors, fell in June to 23.2 percentage points. The average lending rate declined to 31.1 percent from 32.9 percent in May. Yet prudence is forcing lenders to reverse some of the spread declines of the prior months. In the month through July 16, the spread rose to 23.5 points, Tulio Maciel, the central bank's head of economic research, said in a news conference on Thursday.