Brazil looks to loosen restraints on auto loans

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The national flag of Brazil.

Brazil is looking to loosen rules for auto loans to stimulate automotive lending and sales. (Photo Credit: Public Domain/Dbenbenn/Wikipedia)

A nation that many economic experts consider on the cusp of becoming a superpower, Brazil, is looking for ways to bolster new car loans and improve the welfare of its local automakers. Slow vehicle sales have sent inventory soaring to 2008 levels, but as Brazilian media indicates, the government is taking actions to stimulate automotive lending so that fortunes can change.

Stimulating auto loan generation

The slump in the Brazilian automotive industry has caused many to worry that mass layoffs will soon become a reality. Like many nations that are reeling from weak economic recovery following the global crisis, Brazil is also struggling to create economic growth. Brazil’s central bank experienced an unexpected contraction in March, after months of teetering on the edge of a double-dip into recession.

The Brazilian government’s latest effort to foster recovery aims to boost auto sales by making it easier for its consumers to finance a vehicle. Newspaper Valor Economico reports that the national finance ministry may cut transaction tax on auto loans. Another possible move that may be in the planning stages is that the central bank would reduce reserve requirements for satellite banks, provided the funds are then used to generate new car loans.

Rising credit, rising debt

Currently, Brazil is the world’s fifth-largest car market, due in no small part to aggressive moves made to keep automotive lending fluid. However, the rise in defaults have tempered auto lenders’ eagerness. As a result, the total number of new car loans dropped during the first quarter when compared with the same time in 2011. Considering that Brazil’s fast-growing middle class has made the nation a target for the largest automakers in the world, among them Fiat S.p.A, Volkswagen AG, General Motors Co. and Ford Motor Co., it is understandable that the Brazilian government is looking to expand the automotive lending market. It is also perhaps understandable that household debt has reached record levels.

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A closer look at default

Brazil’s chief association of automotive finance institutions – ANEF – noted that auto loan defaults rose to 5.7 percent in March, up from 5.5 percent in February. ANEF predicts that default rates will decline by late 2012 as automakers and their financing arms modify the rules regarding auto loans, something banks do not view with universal favor.

“Banks opened up the taps too much before, and now they’re closing them too much,” said Flavio Meneghetti, president of Fenabrave, a Brazilian automotive dealer association.

Sources

Automotive News

Fox Business

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