Bad cap, good cap

FINALLY our sole monetary authority, the Bangko Sentral, has spoken against the pending bills in Congress that seek to impose ceilings on credit-card interest rates.

There are seven of those bills in the House of Representatives—all seeking caps on the rates, including penalties and surcharges, which the 19 credit-card issuers in the country apply only on delinquent accounts.

It is hard to say whether or not our beloved congressmen only want to encourage such irresponsible consumer behavior as defaulting on credit-card payments.

According to statistics compiled by the Credit Card Association of the Philippines, or the CCAP, the majority of those holding the almost 7 million credit cards issued in the country do not pay for a single centavo in interest charges, because they settle their credit-card bills on time.

Those well-behaved cardholders actually enjoy “free credit” for as long as 51 days at times, which is the period between their actual purchase and the “due date” for payment, as indicated in their credit-card bills, because the bills take time to process.

The bad news is that, for a lot of cardholders in the middle class, such free credit will be gone with the caps on interest rates proposed in those seven House bills.

The BSP itself said the proposed caps were a bad idea. In effect, they are merely “credit rationing,” which is not good at all. Really, a lot of the present cardholders would simply fail to qualify for consumer credit.

Why is that? Because of the “re-imposition” of such ceilings (and, yes, we already experimented with the idea of the government playing god in the financial system), credit-card companies would tend to clamp down on consumer credit.

The BSP noted that credit-card charges were basically “unsecured loans” given by the credit-card companies, which are all banks, by the way.

On top of the high cost of running the credit-card business, the BSP noted that the banks incur costs to cover for the “advance” payment they make to merchants, in case of default or delayed payment by the cardholders.

The BSP said the “fundamental issue” here was “risk exposure.” Translation: The caps on credit-card interests will deny credit-card firms the ability to price properly their consumer credit—or delayed payment and even outright default, in the case of credit cards. Pricing is based on “risk profiles” of cardholders.

Thus, the BSP argued that if credit-card firms, i.e. the banks, could not cover for such risks in their interest charges, they would tend to chop the number of their cardholders.

The BSP called interest rate ceiling a “distortion” in the credit market, and that the “distortion” would only lead to cuts in consumer credit given out by the banks.

Guess who among us would be the first to go. (Hint: not those rich congressmen.)

The last time I checked, the BSP was still the monetary authority in this country, at least based on RA 6753 that created the BSP. The law specified that the “primary objective of the Bangko Sentral is to maintain price stability…”

The BSP now doubts the imposition of interest-rate ceilings, as sought by the seven House bills, can really make for price stability.

Me, when it comes to monetary policies, I have more faith in our monetary authority anytime than that of our beloved congressmen. –Conrado R. Banal III, Philippine Daily Inquirer