Brazil's central bank weighs lender curbs as household debt hits record

Brazil's central bank is preparing measures to address rising household debt, with policymakers leaning toward restrictions on lenders rather than an immediate cap on borrowers' debt-service ratios, according to two people familiar with the discussions.

The sources, speaking on condition of anonymity, said officials are worried about the widespread availability of costly credit, weak transparency, and poor financial literacy. These factors, they believe, have encouraged excessive lending to already stretched borrowers.

Central bank data released on Friday showed the ratio of household debt service to income, excluding mortgages, hit a record 26.6% in June, up from 25.7% at the end of last year.

One source said policymakers broadly agree with the International Monetary Fund, which in July recommended regulatory steps to lower systemic risks. However, restricting individuals' loan eligibility through a maximum debt-service-to-income ratio—a cap the IMF endorsed—is not the authorities' preferred first step.

Following its Financial Stability Committee meeting this week, the central bank said it was preparing measures to mitigate risks from high-cost household debt while strengthening the sustainability of credit growth. Analysts at Citi interpreted this as a shift in focus from the pace of credit growth toward lending standards and credit quality.

Specific measures have not been disclosed. In a research note, BTG Pactual suggested the central bank could consider higher capital and reserve requirements, steeper risk weights, changes to the IOF financial transactions tax, or introducing a positive countercyclical capital buffer (CCyB). The central bank kept the CCyB at 0% this week but has signaled it may raise it.

Officials have previously flagged revolving credit-card balances and unsecured personal loans as concerns. More than half of Brazilian credit card users—52.8 million people—carry revolving balances, which can carry up to 15.1% interest per month, or interest-bearing installment loans.

The rising leverage underscores mounting strain on household finances despite higher incomes and historically low unemployment, reinforcing concerns that rapid credit expansion and high borrowing costs are eroding purchasing power.