BRASÍLIA—Renato Saliba offers a good example of why Brazil’s economy doesn’t grow faster. For 25 years, he bought and sold homes in this capital, occasionally using his credit card to cover the acquisitions.
But when Brazil’s 2015 recession took a bite out of his income, the 59-year-old realtor couldn’t keep up with interest rates that were as high as 630% a year. His unpaid debt grew so quickly he shut down his business and laid off five employees. He still has debts and is unable to get credit.
“There’s no hope. It’s traumatizing,” he said.
Average bank-lending rates in Brazil are 53%, the highest among 55 developed and underdeveloped countries, according to Trading Economics, a research firm. The high rates hobble a consumption-dependent economy by curbing financed shopping and making credit a risky game for entrepreneurs like Mr. Saliba, economists say. The issue has become a hot button leading up to the October presidential election as candidates offer prescriptions for a country mired in low growth.
The central bank has cut the basic rate by which banks lend to each other to a historic low of 6.5% from 14.25% two years ago. But in July, annual consumer rates for credit cards topped 270% for unpaid balances.
Part of the problem is a lack of competition among Brazil’s big banks, a few of which gobbled smaller competitors and survived a succession of economic crises over the years. In a country of 210 million, five banks, including two controlled by the government, dole out 82% of all consumer lending, according to the central bank. Economists say this allows the banks to set high rates, offer low-quality service and mask loan details.
According to a 2017 World Bank report, lending rates paid by Brazilian borrowers were on average 38.4 percentage points higher than those paid by the lenders themselves, compared with a spread of just 4.6 percentage points in Mexico and 9.7 percentage points in neighboring Argentina.
“The banks can do whatever they want,” says retired Army officer Rogério Nonato, 61 years old, whose $780 monthly pension leaves little room to pay down a $4,600 debt load.
He complains that a lender failed to clearly explain the conditions on an $800 personal loan he took in 2015. When he fell behind on monthly payments, the balance spiraled higher. “It’s outrageous,” he says.
The Brazilian banks federation, Febraban, says there is enough competition and instead blames taxes, high default rates and regulation. “Brazil has high costs on financial activity that financial institutions can’t control,” Febraban said.
Consumers, facing high interest rates and 13% unemployment, are reluctant to take on credit. Brazil is expected to grow 1.5% this year, a rate economists say could be higher if consumers felt more confident about buying big items on credit.
The World Bank says household consumption in Brazil grew 1% last year, less than half the global average of 2.1%.
“Lower rates would certainly fuel economic growth in the long run,” says Marcio Holland, an economist at Getulio Vargas Foundation in São Paulo.
With the presidential election approaching, some 61.6 million people have been reported as being in default because they are a day or more behind on their payments to banks and credit cards, according to credit consultancy Serasa Experian. Candidates have taken note.
“We need to unlock credit to make Brazil grow,” Geraldo Alckmin, a conservative presidential hopeful, said in a recent debate without elaborating. A leftist candidate, Ciro Gomes, has pledged to help millions of debtors by having the government negotiate with lenders to reduce interest on defaulted loans and then offer subsidized credit from Brazil’s large state-controlled banks that debtors could tap to pay off their outstanding loans.
One obstacle toward lower lending rates is that many Brazilians don’t have a credit history that lenders can access to gauge individual risk and lower rates to clients with higher scores.
The central bank wants to create consumer-credit ratings like those in the U.S., which could lower average interest rates by 1.15 percentage points, says credit research firm Boa Vista SCPC. But Brazil’s Congress is reluctant to pass legislation allowing banks to access credit-related information, fearing it would hurt consumer privacy.
It doesn’t help that many Brazilians fail to pay their loans on schedule. Central bank data show that for credit card balances, the default rate reaches 35%. Lenders have a hard time collecting debt mainly because of what Otavio Damaso, regulation director at the central bank, calls far-reaching consumer-protection regulations that banks find onerous.
“Consumer law gives the impression that debtors are being protected against their creditors,” Mr. Damaso said. “But it ends up hurting everybody,” including good payers.
A widespread practice in consumer retail lending—which embeds borrowing costs into the price tag so buyers can’t tell how much interest they are paying—is blamed for heightening lending risks and increasing costs. A trade group for credit-card firms, Abecs, will soon launch a campaign asking retailers to phase out these types of offers and more clearly state interest rates.
The central bank is tackling other factors that add costs to credit, like reducing to 25% from 40% the mandatory deposits banks must hold.
Ester Souza Rego, a 33-year-old auditor, is among those seeking relief. Ms. Rego is a mother of two who has been in and out of jobs in recent years and is struggling to pay a $1,000 debt sprouted from a $250 purchase.
“There must be a way to lower interest rates,” she said after leaving a branch of the Serasa consultancy, where she was seeking help. “I have small children and may need credit if I lose my job.”
Write to Paulo Trevisani at paulo.trevisani@wsj.com