On usury, interest rate cap, and tax on foreign remittance

One of our readers, Zaide Capistrano, has asked about an anti-usury law after reading our last column “Capping Credit Card Charges.” Here is some background information in response to Capistrano’s query and for the benefit of other interested readers:

There was a Usury Law enacted in 1916, (also known as Act 2655). This was amended by Presidential Decree No. 116, which set the maximum rate of loan interests at 12 percent per annum. Any charge over the 12-percent rate was regarded as usurious.

In December of 1982, however, the Central Bank of the Philippines (before it was renamed Bangko Sentral ng Pilipinas) issued Circular No. 905 effectively suspending the law by removing the ceiling on interest rates.

Thus, banks and other lending individuals, groups or institutions may generally charge more than 12 percent per year. Any abuse on high interest rate lending, however, is tempered by cases filed in court where on some occasions it ruled against lenders that exhibited “unconscionable” interest rates.

There is a group called Advocates for Truth in Lending, Inc. that filed a petition for certiorari with the Supreme Court last year seeking to void the central bank’s almost three-decade-old ruling.

Cap on credit card charges

Recently, our lawmakers have introduced several bills in the upper and lower houses that propose for a cap specifically on credit card debt. This is almost similar to actions taken by the legislative body in the United States.

These bills providing for a cap on credit card charges are still pending in the House of Representative as our legislators have been distracted by the media focus on hearings regarding alleged AFP corruption and, of course, the main show, the impeachment of the Ombudsman Merceditas Gutierrez.

Credit card oligopoly

One other reader, Manuel Cantos, has written his reactions to my earlier column on credit card issues. Here is what he says:

“I agree with your views from the perspective of resource allocation. Capping interest rates will release loanable funds to more productive sectors, e.g., MSMEs. Furthermore, where credit is scarce, expect interest rates to rise; where it’s plentiful, interest rates fall.

“But not credit card interest rates which remain at 3.5 percent per annum whether funds are aplenty or scarce. The BSP and CCAP [Credit Card Association of the Philippines] attribute this phenomenon to market forces!?!

“In contrast, domestic oil prices rise or fall depending on international oil prices. Now, that’s market forces. How many kinds of market forces are there anyway?

“Is there one for commodities traded internationally, another for credit card interest rates, at least for the Philippines? Isn’t there an oligopoly among local credit card companies?

“I also agree that capping interest rates on grounds of efficiency in credit allocation and utilization as it will compel banks and credit card companies to be more prudent in approving credit card applications.” -Rey Gamboa (The Philippine Star)

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.