CCAP opposes cap on finance charges

by Lawrence Agcaoili (The Philippine Star), 25 Aug 2020

Warns of more defaults

MANILA, Philippines — A proposal to impose a cap on finance charges, if applied to all types of interest rates, may kill the credit card industry at a time when the default rate is expected to double due to the impact of the pandemic, according to the Credit Card Association of the Philippines.

Alex Ilagan, executive director of the Credit Card Association of the Philippines (CCAP), told The STAR the industry could collapse if the planned ceiling is applied to all types of interest rates.

“Our understanding is that the 24 percent cap will only apply to cash advance and installment transactions,” Ilagan said. “If that is applied across the board to all types of interest rates, it will kill the industry.”

Ilagan said the credit card industry expects the default rate to double from the pre pandemic level of four percent.

“We expect it to double compared to the pre-COVID period,” Ilagan said.

In a draft circular forwarded to major stakeholders for comment, the BSP is set to impose a maximum finance charge equivalent to an effective annual interest rate of 24 percent for credit card cash advances and installment purchases.

The regulator said the ceiling on finance charges would be subject to a review every six months.

Ilagan said the industry is awaiting the release of the regulation on the planned ceiling on finance charges for cash advance and installment transactions.

Interest or finance charges are imposed on the unpaid outstanding balance as of cut-off date each time a cardholder pays less than, or does not pay on time, the outstanding balance stated in his or her statement of account.

These charges are imposed until the outstanding balance and applicable interest are fully paid.

BSP Governor Benjamin Diokno said the planned imposition of a maximum finance charge for credit card cash advances and installment purchases is fair as the Monetary Board already slashed interest rates by 175 basis points to an all-time low of 2.25 percent so far this year.

“I think it is in the sense of fairness, right, the BSP has been cutting the interest rates. In fact the policy rate is now 2.25 percent, that’s the lowest ever I’ve seen. The interest rate on credit cards, which is considered to be unsecured consumer loan, goes up to about 40 percent. So to me that is unacceptable,” Diokno said in an interview on ABS-CBN News Channel.

By limiting or putting a cap just like in neighboring countries, Diokno said more consumers would be inclined to use their credit cards.

Despite aggressive monetary easing by the BSP including the cumulative 175 basis points cuts in interest rates, credit growth slowed down for the third straight month to an eighth-month low of 9.6 percent in June due to the impact of the COVID-19 pandemic.

Preliminary data from the central bank showed loan disbursements of big banks amounted to P9.28 trillion as of end- June or about P817 billion higher than the P8.47 trillion released in end June last year.

Credit card loans jumped by 28.4 percent to P410.4 billion as of end-June from P319.64 billion as of end- June last year.