(Recasts to detail provisions, defaults data; adds comments, background throughout)
By Guillermo Parra-Bernal and Luciana Otoni
SAO PAULO/BRASILIA, Feb 25 (Reuters) - Brazil's private-sector banks boosted loan-loss provisions to their highest level in 20 months in January, central bank data showed on Wednesday, as rising corporate defaults led them to tighten loan disbursement standards.
Last month, domestic private-sector banks set aside the equivalent of 7 percent of their loan books to cover credit losses, the biggest since May 2013, the central bank report found. The banking system's default ratio rose for the first month since May.
The data show the conservative underwriting practices that have shielded Itaú Unibanco Holding SA and other non-government banks from years of economic weakness in Latin America's largest economy. Economists are predicting that Brazil will experience its steepest economic contraction this year since 1992.
Outstanding loans to companies fell 1.1 percent to 1.59 trillion reais ($551 billion) in January. Loan approvals for the segment stand to suffer temporarily due to rising risk aversion and sluggish demand, analysts said. The delinquency ratio for corporate loans rose to 2.2 percent from 2.1 percent in December.
"What we are witnessing is a tightening of credit conditions in light of a rapid deterioration of the economic picture as a whole, especially on the corporate front," said Alberto Ramos, chief Latin America economist with Goldman Sachs Group Inc in New York.
State-run and foreign private-sector lenders may have to follow the prudent stance of private-sector banks if they want to protect capital and remain profitable, Ramos said.
Provisions at government and foreign banks remained unchanged at 3.7 percent and 5.3 percent of their loan books, respectively, the report added. Defaults climbed 0.1 percentage points for state banks, hitting 2.2 percent, the report showed.
Most banks are refraining from making loans to engineering and oil services involved in a corruption probe at state-controlled Petróleo Brasileiro SA, increasing the default risks in those sectors. Scarcer funding could hamper refinancing in distressed sectors such as sugar and ethanol.
In January, the average cost of corporate borrowing registered its biggest jump in a year. Spreads, or the difference between the rate that banks charge on a loan and the cost of their funding, widened to a three-year high, the report showed.
According to the report, banks cut their consolidated loan books by 0.2 percent to a total 3.012 trillion reais in January.
$1 = 2.88 Brazilian reais Editing by Chizu Nomiyama and Christian Plumb