Tuesday, March 12, 2013

Credit and Brazil: A Puzzle

You can buy these shoes for R$129.90 or you can pay in 5 monthly installments for R$25.98
Credit markets were notoriously tight in Brazil until very recently.  The government tightly controlled the banking sector (and still has a big foothold in retail banking - both Banco do Brasil, my bank, and Caixa are government run)*, the rules for collateral and banks ability to collect on collateral were tight, and therefore finding consumer credit was incredibly difficult.  I remember my friend buying an apartment about 10 years ago required most of the price to paid up front - only a small amount could be borrowed.

From what I have been told the liberalization of laws, loosening of restrictions and especially the arrival of the Spanish bank, Santander, changed everything in less than a decade.  Suddenly credit is everywhere and you see the effects: cars are now affordable to working class people and the housing boom is continuing unabated.  This is generally the story you get about traffic - it wasn't so bad in places like Salvador until suddenly everyone could buy a car on credit.

But one aspect of the credit market puzzles me: just about anything you buy that is even remotely durable, you can buy in installments and for no interest.  For example, you want a blender and so you walk down to Extra and pick one out for R$60.  You can pay it all now or you can pay for it in up to 12 monthly installments - sem juros or no interest.  As an economist I know the rational thing is to buy in installments (the present discounted value is less than the one-time price) but as a consumer not used to such things I never do.  I am still taken aback when I book a plane ticket and I am asked if I want to pay for it in installments.

These installment plans are everywhere, from the aforementioned plane tickets to tennis shoes.  But why?  And maybe even more to the point, why not in the US?

One reason may be that credit cards are still scarce?  But still spreading out payments on credit cards in the US required you to pay a lot of interest.  I suspect that this is an aspect of social norms carried over from when credit was scarce and stores figured out their own credit.

It is also, I suspect, an aspect of the ubiquity of the taxpayer ID here in Brazil.  The CPF is a number you need for almost anything that requires monthly payments, opening bank accounts, cell phones, you name it.  And I have been told that if you get a bad mark associated with the CPF - for example if you fail to pay for your new Adidas - it is very difficult to clean up.  A form of bad credit score if you will.  The US doesn't have such a system that is so ubiquitous in everyday life.  Credit scores are for big purchases and credit cards.  

Anyway as a good economist I figure that both systems are equilibria in their respective countries, but I am not entirely satisfied that I have figured out why.  Ideas?


*Corinthians Futebol Club had to get special permission from FIFA to have Caixa as a shirt sponsor as FIFA has rules prohibiting state sponsorship of teams.

No comments: