Household debt hits record 50.1% of annual income

Brazilian household debt exceeded 50% of annual income for the first time on record, the Central Bank reported. The ratio reached 50.1% in August, its highest level since the data series began in January 2005. Delinquency on non-earmarked loans to individuals also hit a record 8.1% in September. Analysts attribute the deterioration to high interest rates and the growing share of household income devoted to debt payments.

The Central Bank’s Monetary Policy Committee (Copom) will decide on the benchmark interest rate next Wednesday (Nov. 4), amid uncertainty over whether to extend or pause the monetary easing cycle that began in March.

The Central Bank measures household indebtedness as the ratio of outstanding debt to income accumulated over the previous 12 months, using gross household disposable national income as its benchmark. The debt-service ratio, which measures the share of monthly income used to repay loans, also reached a record in August, rising to 29% from 28.8% in July.

Fernando Rocha, the Central Bank’s head of statistics, said household indebtedness remains on an upward trend, despite relatively small fluctuations in recent months. “Although household indebtedness has been fluctuating for several months, particularly throughout this year, between 49.7% and 49.9% of annual household income, it rose further in August, reaching 50.1%,” he said.

Last week, the Central Bank announced measures aimed at curbing the active, personalized marketing of expensive credit products to vulnerable borrowers. The restrictions target people whose income is insufficient to cover basic living expenses, those with limited financial knowledge due to low levels of education, borrowers who repeatedly rely on emergency credit, and those with recurring overdue balances. Central Bank Chair Gabriel Galípolo said additional measures would be announced before the end of the year.

Another warning sign is the delinquency rate on non-earmarked loans to individuals, which rose 0.1 percentage point in September to a record 8.1%. The economy-wide delinquency rate, covering all loans to households and businesses, remained at 5%, matching the highest level in the series.

Structural pressures

Sara Paixão, a macroeconomic analyst at InvestSmart XP, said structural factors, particularly high interest rates, continue to drive delinquency despite debt renegotiation programs such as Desenrola. She warned that expectations of slower economic activity in 2027 could make it even harder for households to manage their finances.

“Weaker [GDP] growth could affect job creation and increase unemployment, undermining households’ ability to repay their debts and making it harder for delinquency rates to decline,” Paixão said.

Rubens Sardenberg, director of economics, prudential regulation and risk at the Brazilian Federation of Banks (Febraban), said the latest figures suggest delinquency has yet to peak.

“It gives the impression that the process is continuing. It’s not acute, and the worst phase seems to have passed, but there’s still some deterioration to come.”

Febraban’s periodic survey of member banks projects that the delinquency rate on non-earmarked loans to individuals and businesses will reach 6.1% at the end of this year before easing to 5.9% by the close of 2027.

Goldman Sachs warned in a report that credit conditions would face headwinds in the coming months as economic growth slows, delinquency increases, and household indebtedness and debt-service burdens remain at record levels.

“However, lending activity by state-owned banks, together with credit lines supported by the federal government and these institutions, should continue to sustain the credit cycle,” the bank said.

Citi analysts also pointed to further deterioration in household credit quality, even as the overall delinquency rate held steady at 5%.

“In consumer lending, delinquency on private-sector payroll-deductible loans increased 20 basis points month over month to 10.8%, while credit card delinquency rose 10 basis points to 10%, and personal loan delinquency remained stable at 11.1%.”

Pressure on banks

During Bradesco’s third-quarter earnings presentation, held before the presidential runoff, CEO Marcelo Noronha said the macroeconomic outlook had deteriorated regardless of electoral developments. He described widespread pressure on credit quality, affecting not only Bradesco but the banking industry as a whole.

“I see a period of greater pressure ahead, but I’m confident that our loan portfolio is much more tightly controlled than the market’s,” Noronha said.

Bradesco’s delinquency rate rose to 4.6% in September, from 4.3% in June and 4.1% a year earlier.

At Santander, the rate climbed to 3.4%, compared with 3.3% in June and 2.8% in the earlier comparison period. The bank said the deterioration was driven primarily by lower-income borrowers and the agribusiness sector.

Chief Financial Officer Carlos Muñiz said credit card deterioration had previously been confined to lower-income customers but was now beginning to spread to middle-income borrowers.

“Among high-income individual customers and businesses, performance has been reasonably good,” Muñiz said.

Interest rate uncertainty

Leandro Padulla, an economist at ASA, expects the Central Bank to cut the Selic benchmark interest rate by 25 basis points to 13.5% next Wednesday. However, he said the recent selloff in Brazilian assets following President Luiz Inácio Lula da Silva’s reelection had “significantly increased the likelihood of a hold.”

“If the committee goes ahead with the cut, we expect it to adopt a more cautious tone, acknowledging that the deterioration in financial conditions has reduced the room for further monetary easing. Under that scenario, the most likely signal would be a pause in December,” Padulla said.

Febraban’s Sardenberg said the trajectory of delinquency in 2027 would depend heavily on the macroeconomic environment, which in turn would be shaped by the new Lula administration’s policies, particularly its fiscal stance.

“We’re in an environment where the economy is slowing down, there’s no doubt about that, and this could affect employment, while household debt-service burdens are already quite high. On the other hand, banks are cautious, and riskier lending segments are slowing. So if the government addresses the fiscal issue, we could see delinquency deteriorate but at a gradually diminishing pace. However, if the market continues to price in a very high interest rate curve, there could be a significant additional deterioration [in delinquency],” he said.

Tighter lending rules

On Thursday (Oct. 29), Itaú BBA lowered its 2027 earnings forecasts for Nubank, citing continued deterioration in consumer credit conditions. Analysts warned that lower-income borrowers and unsecured lending products — two areas where the fintech has a particularly strong presence — were likely to face the greatest pressure.

They also highlighted risks from new macroprudential measures expected to be announced soon by the Central Bank.

“The measures under consideration include stricter prudential requirements for certain credit products, closer monitoring of borrowers’ repayment capacity, and greater emphasis on suitability and financial affordability — the ability to meet repayment obligations — when credit is granted,” the analysts said.

An industry executive said implementing the new measures would be operationally challenging but expected the Central Bank to introduce tighter restrictions. One possibility is an increase in the risk-weighting factor applied to credit card lending.

“The risk-weighting factor is definitely on the table, but I have doubts about its effectiveness. If you raise the cost, that could reduce credit supply on one hand, but it could also lead to higher prices for consumers on the other. It’s not a simple equation,” the executive said.