Payroll loans by old age and survivors pensioners: an exploratory study using the principles of actuarial mathematics

Fernando Henrique Câmara Gouveia,Luís Eduardo Afonso

doi:10.15728/bbr.2010.7.1.4

Abstract

Credit activity has been growing strongly in Brazil since 2004. An important factor is personal loans to people receiving benefits from the Brazilian National Social Security Institute (INSS) with repayment by automatic deduction from their benefits. This paper investigates whether the rate of return obtained by financial institutions on these loans is the same as that on personal loans to salaried workers with automatic payroll deduction. The method to calculate these rates includes use of the actuarial mathematics’ principles, through the incorporation of a biometric risk factor associated with the borrower’s age. Employing a sample of 23 financial institutions, we compare the difference in the rates of return after considering the default costs, which are influenced by borrowers’ characteristics of two groups. The first group, composed of pensioners (both retirees and people receiving survivor pensions), is the treatment group. The control group is made up of São Paulo Municipal Government employees. The results provide significant evidence that, for the sample studied, the return obtained by financial institutions is greater on loans to social security beneficiaries.

Highlights

Credit activity has been growing strongly in Brazil since 2004
In this article we investigate whether the rate of return obtained by financial institutions on payroll loans to social security beneficiaries is the same as that on payroll loans to salaried workers
We addressed the research question based on an index called the Rate of Return after Default Costs (RRADC)

Summary

Introduction

An important factor is personal loans to people receiving benefits from the Brazilian National Social Security Institute (INSS) with repayment by automatic deduction from their benefits. This paper investigates whether the rate of return obtained by financial institutions on these loans is the same as that on personal loans to salaried workers with automatic payroll deduction. Starting in 2006 there was a sharp reduction of the average interest rate on such credit transactions, which fell from 54% a year in January 2006 to 44% in January 2008. These figures are shown in Graph 1i. GRAPH 2: BALANCE OF DOMESTIC LENDING(CREDIT AT THE REFERENTIAL INTEREST RATE) Source: BCB (2002, 2003, 2004, 2005, 2006, 2007 and Time Series/ Economic Department)

Objectives

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Results