At the mercy of loan sharks Pending bills before

Congress seeking to put a cap on credit card interest rates appear to be very selective since they do not cover informal lending institutions which are free from the planned stiffer regulations on interest rates.

No wonder the Bangko Sentral ng Pilipinas (BSP) is lukewarm about such measures since it says they could lead to reduced credit facilities for small-time borrowers which would then affect the economy.

Consumer spending plays a pivotal role in the growth of the economy. Should card companies cease to grant credit, the 30 to 35 percent of consumer spending in retail outlets is automatically put in jeopardy. Should the cards industry be affected, the entrepreneurs who help build the economy will also eventually suffer.

The unregulated informal or black market will eventually fill the vacuum for consumers who will not have any other alternative.

It is a valid point considering that informal lenders like pawnshops, small investor lending companies, and unregulated black market including those engaged in the so-called “5-6” or loan sharks, charge higher interest rates compared to credit cards where interest rates range from 2.5 to 3.5 percent. Pawnshops charge between four and seven percent interest apart from the required collateral, while loan sharks collect 20 percent interest.

Our lawmakers should be fair enough to cover all capital markets in their proposed bills if they are indeed serious about the issue of protecting consumers against unwarranted fees.

Credit card issuers would tend to be stricter in extending credits to consumers. And most likely, consumers would turn to informal lending institutions and unregulated black market. Unfortunately, issue on interest rates remain – even higher. Hence, the end result is more unfavorable to the consumers.

Just like in the US, credit cards are now among the most common sources of financing for small-business owners in the country. That is how the free competition policy works. It allows convenient access to credit owing it to the absence of cap or ceiling on the interest rates.

The capping of credit card interest rates was once an issue that was debated for so long in the US. There were moves in the US Congress to enact a law to place rate ceiling but all failed and the Credit Card Act of 2009 put more emphasis on the protection issue in terms of unwarranted increases in fees and other credit card fraud. The law preferred not to adopt any cap on the rates but more on the protection of the consumers against the unfairly and deceptively complicated credit card contracts.

Like in the US, the current financial system in the country allows capital markets to compete. It is the market forces that dictate interest rates and it gives the credit cardholders the option to choose which credit card company they would prefer.

To date, there are about three to four million credit cardholders in the country from 6.7 million cards issued by credit card companies. Data from the BSP showed that there are cardholders who own two to three plastic cards.

Regulations are in place since 2003 through CBP Circular No. 398 and the financial system, particularly the credit cards industry, has since been running well. And in December 2010, the BSP issued Circular No. 702 adopting important features from the US Credit Law of 2009 that includes improving a fair disclosure of credit terms to customers.

BSP Deputy Gov. Nestor Espenilla recently warned Congress that a cap on credit card interest rates could cause contraction in credit and drive low and middle-income consumers to seek credit relief from alternative lending operators like pawnshops and informal lenders which surprisingly are not being targeted on the interest rates issue.

BSP is one of the two bodies which can regulate interest rates. The other is Congress. The problem with proposed measures is that once it becomes a law, the interest rates will have a permanent effect and can only be changed by means of a long and winding legislation process. In other words, the law will be inflexible. On the other hand, the BSP, like the US Federal Reserve, has a lot of rate choices and is flexible enough to adopt quickly to economic and credit situations.

BSP is in a better position to handle the issue of interest rates not just simply as a government regulator but also given its expertise on the capital market. It can issue directives to solve immediately any monetary-related problems or issues. It could lower or increase rates depending on the needs of the economy. It has a wide cocktail of options without being constrained by the force of the permanence of the law.

What Congress is doing is appropriating for itself the role that is supposedly the expertise of an experienced and tested monetary expert, the BSP.

Japan, by the way, experienced a two-third dropped in consumer lending after the government placed a cap on credit card interest rates. We do not want the same thing happening to us. –Mary Ann Ll. Reyes (The Philippine Star)