Anti-greed bill wants to limit interest rates in Brazil: understand why it would be a disaster

By Bruna Komarchesqui

This month, a bill presented by federal congressman Mauricio Neves (PP/SP) proposes the creation of an anti-greed law limiting the charging of interest rates in Brazil.

PL 398/2023 suggests forbidding “interest that exceeds 100% of the value of the good or service financed by credit card and/or overdraft”.

The idea is that when the debtor pays the equivalent of twice the amount initially borrowed, the debt is cleared “regardless of contrary contractual provisions”.

All charges exceeding this limit, Neves argues, should be returned in double to the borrower.

According to economists interviewed by Gazeta do Povo, this is an attempt at a simple solution to a complex problem, whose practical effect should be precisely the opposite of that intended by the proponent.

The economist and doctor in international relations Igor Lucena points out that the proposal is simplistic, not considering important economic factors regarding credit, such as risk.

“The person who pays more interest is the one who has more risk. The person who lends, be it a bank, financial institution, or any credit operator, considers the borrower’s capacity to pay, the taxes, and the risk of not receiving. It makes no sense to say that everyone borrows the same and pays the same,” he explains.

In other words, if the legislator assumes that limiting interest rates will facilitate credit, in practice, the effect will be the opposite.

“If this law were approved, those who offer credit would only offer it to people who are absolutely sure that they will pay. There would be a drastic reduction of credit in the economy; nobody would give credit to possible debtors of rank B and C. These are ideas that, in the legislator’s mind, have good intentions but lack the technical knowledge to understand how the market works. This shows the low level of the deputies and the lack of advisory services”, criticizes Lucena.

Economist Claudio Shikida, professor at Ibmec MG, analyzes the proposal is a “kind of attempt to make a ceiling”.

“It looks a lot like the idea of a price freeze. You establish an arbitrary ceiling, a magic number of 100%, to say that this is the total size of the cake, but it doesn’t make much sense,” he criticizes.

For him, it is contradictory to say to the credit market, “the guy who gets into a lot of debt is going to be forgiven”.

“What are you encouraging with this? The behavior of indebtedness,” he concludes.

Igor Lucena adds that the proposal would stimulate fraud since citizens always look for loopholes in the law.

“The person who takes R$1,000 and stops paying for two years will have a debt at current levels of R$4,000 to R$5,000. If the person takes one and only pays two, the operation would leave the finance company at a loss,” he explains.

The scenario, therefore, “would have a devastating effect; it would destroy the national economy.”

“Today, in the investment of a house, for example, in practice, three or four houses are paid for. But no one can afford to pay cash. If you create a context of loss for financial institutions, they will stop lending. This would drastically dry up the credit supply in the country”, he predicts.

PRESIDENTIAL CAMPAIGN

The idea is not unprecedented.

During the presidential campaign in August last year, candidate Ciro Gomes (PDT) proposed the so-called “anti-greed law” while participating in an interview on Jornal Nacional  (Rede Globo).

The next day, he detailed the proposal, which was not in his government plan registered with the TSE:

“I studied the international experiences and found the English one, where you borrow R$100 and, whatever the term when you hire and pay R$200, the law determines the discharge. Brazilians don’t know it today, but if they borrow R$100, in just one year they owe R$400. I want to set a limit in which twice the amount borrowed is the legal limit for the debt of Brazilians,” he justified at the time.

Ciro Gomes did not explain how the articulations with the banking sector would be to reach the goal.

For the then-candidate, the most important thing was to change the situation of 66.6 million Brazilians with a negative credit rating in Serasa (something like four in every ten people, a record since the beginning of the institution’s historical series), which would generate the “embarrassment” of not having access to credit due to bank debts.

“And this explodes in unemployment because if families don’t have credit and income, they don’t consume. And if they don’t consume, the economy stops, and unemployment explodes, which is what we are seeing,” he said.

In the bill’s text, congressman Márcio Neves also cites the British model as an example.

There, he explains, the target of legal interest limitation since 2015 is the loans of the type “short-term and high-cost short-term credit”.

“This is credit used to cover everyday expenses and, therefore, I believe it can also be disciplined in the same way here, because in Brazil, everyday expenses are increasingly made through credit cards and overdrafts, causing over-indebtedness and, also, because by approving the measure, we will certainly be contributing to the rationalization of interest charges in the country,” says the entire content of the PL.

By focusing on small loans, Igor Lucena explains that British legislation is more similar to the Brazilian usury law (Decree 22626).

According to article 13, “the crime of usury is considered to be any simulation or practice tending to conceal the true interest rate or to fraud the provisions of this law, to subject the debtor to greater installments or charges, beyond those established in the respective title or instrument.

“Those lenders who charge 1,000% interest are acting outside the law. This happens in smaller credit operations. If it were a project aimed at these financial institutions, perhaps it would be more logical, but this is not the case. Looking for a simple solution to a complex problem ends up creating an even more complex problem”, analyzes the economist.

THERE IS A LACK OF VIABILITY STUDIES

The doctor in international relations reinforces that, although lowering interest rates is in the interest of many, doing it “with a pen, as in 2015, 2016” doesn’t work.

“The practical effect is that long-term interest rates, controlled by the market, rise. If you decrease the supply of credit, there is an increase in inflation. It’s basically the same thing [as the anti-graft project]; you take positive action in theory by the wrong means. Until now, I haven’t seen any study about this,” Lucena emphasizes.

Claudio Shikida agrees that it is “strange” for a proposal of this type to appear in political campaigns since candidates have economic advisors.

“I think it is a proposal to win votes because it attracts people. There is a profile of indebted consumers in Brazil that comes since the pandemic,” he analyzes.

“I understand that the logic of the votes is more important, but it would be interesting if any proposal like this came accompanied by an impact evaluation study, showing the cost and benefit. A serious, quantitative analysis. As the federal government has done in recent years with relative success, creating that law on regulatory impact assessment. I think having an impact evaluation of these proposed changes would be worthwhile,” he argues.

Gazeta do Povo contacted the office of congressman Mauricio Neves to question the existence of a feasibility study of the project but did not get a reply by the close of this report.

With information from Gazeta do Povo