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(Adds analysts' comments, details)
By Guillermo Parra-Bernal and Silvio Cascione
SAO PAULO/BRASILIA, Feb 24 (Reuters) - Loan defaults in Brazil will likely climb in the coming months, central bank data suggested on Wednesday, as the nation's deepest recession in decades and rising credit costs strain borrowers' capacity to stay current on their debts.
Loans in arrears between 15 days and 90 days, a measure of early defaults, rose in January at the fastest pace in four months, totaling 5.6 percent of outstanding loans, a report showed. For corporate loans, the early default ratio rose to 3.5 percent last month, the fastest monthly gain since last June.
The data raised some warning flags about the eroding quality of bank loan books in Brazil, where the ongoing recession is expected to be the longest and harshest since 1901. A record 59 million Brazilians were behind in payment of utility bills, or defaulted on loans and bounced checks at the end of last year, credit research firm Serasa Experian recently said.
"What the data showed is that defaults will keep rising longer. We need to assess the intensity of that increase," said Eduardo Nishio, an analyst with Banco Brasil Plural.
The so-called 90-day default ratio, a benchmark for delinquencies in Brazil, rose to the equivalent of 5.4 percent of outstanding non-earmarked loans in January, the report said. Last month, the default ratio was the highest since October 2012.
As a result, loan-loss provisions as a share of capital grew among private-sector and foreign lenders, indicating efforts to cushion their balance sheets from the ongoing wave of defaults. Private-sector banks boosted the provision-to-capital ratio to 8.5 percent, the highest level in almost four years.
The São Paulo Stock Exchange's financial index shed 2.8 percent.
Non-government banks are significantly stricter in approving loans, the data showed. Loan terms will remain tough, "given the deteriorating outlook for growth and the labor market," said Alberto Ramos, chief Latin America economist for Goldman Sachs.
The ongoing credit cycle, the period from trough to peak in defaults, has lasted 11 months and may extend for at least another year, according to Goldman Sachs estimates.
Banks in the country shrank their loan books by 0.6 percent in January, the second month of reduction in the supply of credit in the last four, the central bank report noted. Outstanding loans in Brazil's banking system fell to 3.199 trillion reais ($801 billion) in January.
$1 = 3.9949 Brazilian reais Editing by Lisa Von Ahn and Jeffrey Benkoe