Credit cap

Published by rudy Date posted on April 14, 2011

CREDIT CAP: The Bangko Sentral ng Pilipinas stands firm on its position that letting market forces determine pricing serves public interest best and is the most effective way of allocating credit.

This view does not jibe with a number of bills in the House of Representatives seeking to put a cap on credit card interest rates.

In a position paper submitted to the House, the BSP said: “Setting interest rate ceilings will fuel the moral hazard and adverse selection problems that underpin a credit rationing framework.

“These problems are likely to be exacerbated in an economy such as the Philippines since information asymmetry is endemic even under more normal market conditions.”

* * *

COMPETITION: The BSP says in effect that the re-imposition of interest rate ceilings would mean more stringent requirements in credit card applications. Such credit facility would no longer be readily available — and unregulated black market lending could flourish.

Credit cards fall under the category of unsecured loan. Rates are affected not only by the cost of securing the credit facility but also by the cost of refinancing funds advanced as a result of the transaction.

A market-based interest rate policy fosters healthy competition among financial firms, including credit card companies. It does not only attract depositors, it also encourages borrowers to take on debt.

When business responds to market forces, competition sets in. There will not be healthy rivalry once rates are pre-set.–Federico D. Pascual Jr. (The Philippine Star)

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