Banco Central do Brasil said loan defaults are the main reason local banks have not been able to reduce interest rates for households and companies, even as the central bank has lowered its benchmark rate.

In a report on the Brazilian banking space, the regulator said defaults reached 3.2% at the close of 2017, which meant banks had to maintain rates at high levels to account for possible losses.

Average cost of credit fell by 1.3 percentage points during the year and reached 21.3% in December 2017, according to the report, while the central bank's benchmark Selic rate fell by 6.75 percentage points during the same period.

Between 2015 and 2017, defaults were behind 37.4% of banking spreads in Brazil, Banco Central do Brasil said.

The central bank also said competition in the local banking sector has increased in the 18 years through 2017. "Greater competition means lesser cost of credit and greater benefits for the population [and] does not necessarily require lower level of banking concentration," the regulator noted.