Back to the loan sharks?

Amidst all the news about the earthquake and the tsunami in Japan as well as the troubles of migrant workers in the Middle East and North Africa, there is a local issue that should be interesting, if not equally important, to every Filipino especially small-time borrowers and entrepreneurs.

We are referring to the possibility of many credit card companies and other non-bank card issuers tightening up their requirements in extending loans through this facility. And worse, closing down their business if a legislative measure to cap interest rates on credit cards would eventually become a law.

If that happens it would be back to the 5-6 loan sharks (many of whom now enjoy some legitimacy operating as lending investors) for many Filipinos.

The term 5-6 of course refers to the lending rate of these loan sharks who would exact a P6-payment for a P5 loan. Before the popularity of credit cards, the loan sharks or the pawn shops were the main recourse of many Filipinos.

But the situation might be back to what it was if legislators, who have ignored the plight of people resorting to the loan facilities of “lending investors,” would succeed in restricting interest rates of credit card companies.

Whether credit card companies would tend to be stricter in extending credit or eventually close shop, both have strong impact to small-time borrowers and entrepreneurs. The access to credit would not only contract but borrowers would eventually be deprived of availing themselves of this type of credit facility.

The end-result, of course, is obvious. Borrowers would have no other options but to go to unregulated black market lending or the so-called 5-6 lenders who charge an astounding 20 percent per month or 240 percent per annum interest rates. The black market lending will then thrive to the detriment of the consumers who will have to endure the high interest rates imposed on them.

Definitely, this will hurt consumers more which is supposedly not the intention of the House measures. The main objective of our lawmakers is to protect the consumers. And we all agree. But similarly, perhaps we all agree with the contention of the Bangko Sentral ng Pilipinas that capping the credit card interest rates would be more detrimental not only to the credit card industry and the consumers but to the economy as well.

Imagine losing the credit card transactions to unregulated black market lending. Data released by the Credit Card Association of the Philippines have it that as of last year, credit card billings rose to P382 billion from P316 billion in the previous year. The magnitude of these credit card transactions represent about 5 percent of the total loans extended by universal and commercial banks and 25 percent of consumer loans in the country. Also, these transactions account for 30 percent to 35 percent of total retail spending in the country.

For economists, that means a lot. Increase in consumption through credit cards played a pivotal role in sustaining the country’s economic growth, as consumer spending is one of the drivers of gross domestic product. Losing these transactions to unregulated black market would also mean losing government revenues.

Again, it is bad for the economy and we do not want to experience what Japan did for their credit card industry. After the Japanese government imposed the credit card interest rate ceiling, credit card companies became less willing to extend credit to consumers. It was a decision that made the consumer lending in Japan to drop by a staggering two-thirds in two years.

One may wonder why we have to tinker with something that is already well in place. The credit card industry has been regulated by the BSP since 2003. There have been various BSP circulars issued since then, including the suspension of the Usury Law in 1982 and the most recently Circular No. 702 issued last year. All these regulations boil down to promoting the welfare and protection of consumers.

Also, many portions of the proposed bills in Congress touch the issue of pre-approved cards, disclosure requirements, prohibition on disclosure of information, and etc. All these, in fact, are already covered by the existing rules and regulations.

Hearing it right from the BSP, interest rate for the majority of cardholders appears to be a non-issue given the fact that more than 50 percent of about three to four million credit cardholders pay for all their credit purchases on statement due date, thus, enjoying interest-free credit.

Somehow, the credit card industry has a point in raising a howl on the proposed bills. Credit card companies, like in any other business, have their overhead. They have significant investments on infrastructure, systems, manpower, etc., not to mention other financial requirements like investment on the interest-free credit that it gives to its cardholders for an average of 45 days. In a simple analogy, it would take years before a credit card company recovers its investments through the interest rates that it places in credit cards. A risky business, indeed.

The issue whether or not to cap the interest rate on credit cards definitely is a headache for the industry, the BSP as a government regulator, and the proponents of the House bills as well. It would take a careful balancing act to come up with a prudent decision that would benefit all the stakeholders, especially the consumers.

But the free competition policy appears to be ideal. It allows credit card companies to compete among themselves. It is the same reason that credit card interest rates today vary from as low as 2.49 percent to 3.5 percent. It also means that the existing rules and regulations governing the credit card industry are enough.

What we really need is not a new law but more effective ways of implementing these existing regulations especially educating the consumer on all aspects of this type of loan facility. And this is perhaps where the credit card industry failed. –Alvin Capino, Manila Standard Today