Total interest income on loans can be estimated by multiplying these two types of data, and its accuracy can be assessed by comparing the resulting figure to the one published by Bacen for the banking system. The allocation of interest income by business line is then based on the volume of performing loans that belonged to each business line as of end-2007<sup>48</sup> .

As a result of its significantly higher lending rates, the Retail business line accounts for 67 percent of interest income on loans and leases even though it only has 48 percent of gross loans. By contrast, Corporate accounts for 32 and 50 percent of interest income and gross loans respectively, while Government has 1 and 2 percent of interest income and gross loans respectively. The average yield on performing loans by business line is 36/14/18 percent for Retail/Corporate/Government respectively, while the average yield on the banking system’s performing loan book is around 24 percent. As can be deduced, the results for the Corporate business line are heavily influenced by earmarked credit, which brings down the average loan yield and related interest income.

# **Funding of Directed Credit and its Remuneration**

In contrast to non-earmarked loans, directed credit typically has its own dedicated funding sources<sup>49</sup> and it is provided at below-market interest rates. It is therefore important to identify the funding source of the three main directed lending schemes in order to allocate such funding – and its cost – to the relevant business line.

Housing finance, as well as a small portion of rural finance, is assumed to be funded via voluntary passbook savings accounts ( _cadernetas de poupança_ ). Given that the actual amount of housing finance is relatively small compared to the legal requirement to use 65 percent of total _poupança_ for such purposes<sup>50</sup> , it is further assumed that the remaining balance is invested in low-yielding securities. Directed rural finance, primarily via _Banco do Brazil_ , is assumed to be funded by other (“special”) deposits and demand deposits. Finally, directed long-term finance via BNDES (both first and second-tier lending) is assumed to be funded – based on information provided in BNDES’s financial statements – via a combination of other (“special”) deposits, borrowings and subordinated debt (classified as “other liabilities” in Bacen’s balance sheet for the banking system).

# **Allocation of All Other Line Items**

> credit with pre-defined rates (e.g. TR, TJLP etc.), assumptions were also made about the additional spread charged by banks in order to effect the transaction.

> 48 One additional complication relates to interest income that is actually derived from loans classified as non-performing (i.e. D-H ratings). In order to overcome this problem, which affects the assumptions about the average interest rate of performing loans, it is assumed that 10 percent of all interest income on loans actually derives from NPLs and that its allocation across business lines is the same as for interest income on performing loans.

> 49 These include constitutional funds, worker funds based on mandated contributions, legal reserve requirements, and passbook saving accounts.

> 50 Although regulations require 65 percent of _poupança_ funding to go to housing-related credit, banks currently enjoy several exemptions that substantially diminish the effective amount of such funding.

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