Leave the industry alone

Capping interest rates on credit card loans can hurt credit availability badly.

Some lawmakers are pushing for measures that would further regulate the credit card industry, including putting a ceiling on interest rates.

Regulating an industry that for years has promoted competition among credit card issuers would certainly put a dent on the operations of the banking system and other lending institutions.

Credit card is a form of unsecured credit. Meaning, it is a risky business. Given its nature, the Bangko Sentral ng Pilipinas (BSP) regulates the industry for the interest of both the business and its consumers by virtue of Central Bank of the Philippines (CBP) Circular No. 398, which provides internal control guidelines on credit card operations.

The fact is there are six million credit cards issued by various bank and non-bank issuers in the country, owned by three million cardholders. Of these, less than .01 percent has lodged complaints with the Bangko Sentral ng Pilipinas (BSP) concerning interest rates imposed and services rendered by issuers, according to BSP Deputy Governor Nestor Espenilla.

About 13 percent of cardholders have defaulted on their payment, higher than the US’ 29-percent default rate, and the card issuers have to shoulder this lose. But the US Congress did not put a cap on plastic card interest rates and instead allowed free market forces to work.

Espenilla warned that the alternatives to credit cards would be pawnshops and informal lenders that offer higher interest rates.

Placing a cap on the interest rates clearly challenges the policy on competition. Current interest rates among credit card companies range from 2.5 percent to 3.5 percent.

If a cap is imposed, credit card companies might be forced to limit the availability of credit to select individuals, particularly those with proven credit history only.

It’s better to leave the regulating part with the BSP. –Mary Ann Ll. Reyes (The Philippine Star)