Opinion – Why? Economês in good Portuguese: Possible confusions of the Indebtedness Law

The important discussion that takes place in the Executive Branch about the regulation of the Over-indebtedness Law has not made headlines in the economic news, by which the definition of a certain concept can change the operating rules of various types of credit. The idea, similar in spirit to many others, well-intentioned and which, however, hinder more than help, is the following: the debtor cannot be legally charged for a debt that, if effectively paid, would put his net income below a certain “existential minimum”.

Protecting the finances of the most vulnerable is a noble goal, but from the start the law has been ill-conceived and there is still room to get worse. The adverse impact has the potential to generate a collapse in the supply of credit.

It is out of the question that some loan rates are tremendously high, such as credit card revolving rates, exorbitant 350% per year (on average).

There is a certain consensus that three work fronts are necessary to address this problem: (i) awareness campaigns and financial education, (ii) increased transparency and establishment of microeconomic measures that continue to increase competition between financial institutions and (iii) review of taxes and elements of legal uncertainty that make credit more expensive.

The Over-Indebtedness Law may actually exacerbate the problem of legal uncertainty. Nowadays, thousands of Brazilians use credit in different ways, whether it be a credit card, payroll loan, loan in general or as a means of payment, and most of its users do not go into arrears and do not pay this very high interest, in which despite the increase seen during the pandemic.

The law could adversely affect all those who pay their trades on time, and we are talking about trillions in financial transactions. The macroeconomic impact is potentially devastating.

One of the biggest problems with the idea of ​​the existential minimum is that it is itself too diffuse a concept. The minimum should include what? Food and rent? But at what point does food stop being absolutely essential? (Does dessert count? Just rice and beans, or filet mignon for some?) And the rent? How is all this accounted for? Also, why discard the solution of the debtor moving to a cheaper apartment so he can pay the bill for a loan or card?

Well, the business is complicated as a start; imagine at the time of putting into practice, each one assuming the definition of “minimum” that they most feel like! It’s already happening, by the way. Consumer protection bodies are jumping ahead and setting their own “existential minimums.”

And make no mistake: in the thousands of forums across the country, each judge will have their own notion of an existential minimum, creating enormous uncertainty and more litigation and headaches for lenders. But when the headache gets too bad, the afflicted one takes action. Analgesic in typical cases; reduction in the supply of credit in the case in question. And precisely for whom? For the financially disadvantaged, for those who fall within the limits imposed by the existential minimum.

How to minimize the damage of a law that, as it seems, we should take as irreversible at this point in the discussions? The best option is to abandon the idea of ​​defining the indefinable altogether. Abort the whole thing. The second best is to avoid the worst by preventing the amendment from coming out worse than the sonnet, minimizing the economic-legal uncertainty associated with regulation.

Let’s look at the problems with some of the regulatory proposals presented.

One of them advocates that the minimum be given by the value of the minimum wage. It certainly has the advantage of being clear. But as approximately half of the population has income in this range, all of these would automatically be excluded, for example, from the credit card market. It makes sense? Do we want to exclude all the poor from using the card? Another idea that circulates is to set the minimum at 30% of income (strange for someone who earns, say, 20 thousand a month, right?).

Well, if that’s the criterion, lower income people who buy a car on installment or a mortgage could not have any other type of credit. Again, did the proponents think of this consequence? Many people who have payroll loans already have 30% of their income stuck there.

Operationally, how to know exactly the previous debts of each one? And what about income, in a country that has half of the workforce in the informal sector? More: if the user is wrong about his commitment to income, and if the bank grants a certain limit to the customer, whether in the checking account or in the credit card, who is to blame before the law?

Finally, the most absurd proposal: considering the transactional limit of the card, used for monthly payment, as something to be deducted from income in the calculation of the existential minimum! But what about all those who don’t even come close to that limit?

Overcoming all these difficulties is, in reality, an almost impossible task. If we are going to try unorthodox experiments in this area, it would be better to impose a cap on the revolving interest, which is nationally valid, as is the case with overdraft. A rate above, say 180% per year is prohibited, and it is left to the banks to decide how much limit to grant each customer.

The worst case scenario is, however, that we have a free, light and loose existential minimum. If each Procon in Brazil, or each judge in its district, has the discretion to choose the minimum that seems most appropriate, the credit market can easily collapse. Who loses? All.

If the existential minimum is really unavoidable, let it be nationally fixed. And let it be, in fact, minimal.

Mauro Rodrigues (Economics professor at USP and author of the book “Under the magnifying glass of the economist”) and the Por Quê?